Cosgrove Gaynard Solicitors

Why do you need a shareholders agreement?

A large proportion of companies that have shareholders elect to have a shareholders' agreement. But what actually is a shareholders' agreement, and why do you need one?

What is a shareholders' agreement?

Before knowing why you need one, it's essential to know what a shareholders'agreement actually is.

A shareholders' agreement is, as the name implies, a formalised and documented agreement between the shareholders of a company. The provisions of a shareholders' agreement vary between businesses. Generally, however, they will include elements relating to the management of the business, the management of shares,how dividends payments are handled, and outline circumstances in which shareholders may relinquish or sell their entitlements/shares.

Without a shareholders' agreement, matters related to and involving shareholders may only be handled under the provisions of the Companies Act and generally accepted common law.

Why do you need one?

Now you know what a shareholders' agreement actually is, why is it in your interest to have one?

There are many reasons why shareholders' agreements makesense. Here are just a few.

Resolving disagreements

Many new companies question the need for a shareholders' agreement because the shareholders all get on and everything seems easy. That, however, sadly, not always lasts. Shareholders are people, and people will always run the risk of disagreeing. As shareholders form such an integral part of how a business is managed and operated, it's essential to have a defined recourse as to the way arising conflicts can be handled.

The very best time to get a shareholders' agreement is in that stage where your shareholders all get on well and agree with each other. That makes defining the provisions of the agreement a much quicker and easier process than if you wait until people have already begun to argue and question each other.

Managing shares

The shares that a shareholder owns aren't always for life. Circumstances change,portfolios diversify, and for one reason or another, certain shareholders may wish to release their shares. A shareholders' agreement can provide provisions for how those shares are managed. For example, they may provide "first refusal" privileges to those shares to the existing shareholders, rather than immediately offering the shares to outside investors.

There may also be provisions involved whereby shares are tied to employment or relationship to the company. So when an employee ceases to work for the company, dies, or is rendered bankrupt, as examples, the contents of the shareholders' agreement may ensure those shares stay "within" the company.

Attracting investment

Another reason to have a shareholders' agreement is that it makes your company more appear professional, better managed, and generally more appealing.This is particularly important in instances such as when applying for loans or seeking investment. A shareholders' agreement will show that your business is well managed, and will inspire more confidence in potential investors or other creditors regarding the safety of their capital.

There are many reasons why a shareholders' agreement makes sense. Regardless of the size of your business, you should invest in a shareholders' agreement as soon as possible.

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Contact us at 01 2340044 or by email: info@cgsolicitors.ie to learn more, and get the process started today.

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