My weekly perspective… This is often a question that business owners sometimes overlook. A shareholders’ agreement is a necessary tool for all companies, in my honest opinion. Why?

The shareholders’ agreement is not only protective as a sword, to assert the company’s rights over the individual shareholder’s rights but also as a shield to protect the rights of shareholders as defined and set out in the agreement.

Generally, a shareholders’ agreement covers three main concerns:

1. death – what happens when a shareholder passes. Some options could include automatically selling of the shares to another shareholder; continuing as a shareholder; do the shares have to stay “within the family” however family is defined?

2. disability – what the definition of disabled is?  and what happens to the shareholder if a disability occurs or does the shareholder continue as a shareholder?  how is decision making made during the time a shareholder is disabled – to protect the company’s interests and to protect the disabled shareholder’s interests.

3. divorce – with one in 3 marriages not succeeding, the value in a shareholders’ shares can often be a very large part of family assets.  a clear understanding of the valuation and liquidity of those shares can ensure a preservation of the continuance of the business.  I have seen businesses falter because of the financial demands a divorcing shareholder can put upon the company to settle the matrimonial assets in a divorce.

These “Big 3” elements of the shareholders’ agreement deal with potential threats, financial and otherwise, to the business.  There are a lot of other areas covered by a shareholder agreement.  These three can give you a start.

We will discuss in some more detail in later blogs on shareholder agreements.

Learn, think, apply!