If you and your business partners are starting a company, you will naturally focus on factors like revenue generation and recruiting the best people for growth. You may overlook the importance of having an agreement with each other as you might be fully focused on running the company. However, overlooking having a shareholders’ agreement will mean your company is built without a strong foundation for your long-term corporate objectives. A shareholders’ agreement is essential when you are either starting or growing a company in order to maintain a stable and fruitful working relationship with other stakeholders in your company.
What is a Shareholders’ Agreement?
Shareholders’ Agreements serve as the pre-nuptial contracts of the corporate world, establishing procedures for resolving disagreements while safeguarding each shareholder’s assets (amongst many other things).
A shareholders’ agreement of a corporation sets forth the ownership of the firm’s shares, who manages it, as well as the shareholders’ rights and safeguards. A company’s shareholders, whether a majority or a minority, are often party to this agreement.
There should be several safeguards in a well-drafted shareholders’ agreement to give shareholders better protection against various eventualities that could emerge over the course of running and expanding their firm.
Importance of having a Shareholders’ Agreement
A shareholders’ agreement, like a pre-nuptial agreement, is often overlooked but has the potential to enhance a company’s culture by establishing a foundation of trust and mutual benefit.
- It clarifies the rights and obligations of the shareholders: The rights and responsibilities of the shareholders, operating the business, employment considerations, selling and issuing shares, dealing with disputes and conflicts, and granting protection to either the majority or the minority of shareholders are commonly addressed in a shareholders agreement. In the absence of a shareholders agreement, there is a greater likelihood of misunderstandings and disputes. Having an agreement in place makes it easier for shareholders to work through a disagreement.
- It acts as a reassurance to potential investors and ensures that decision-making mechanisms are effectively put in place: The next stage of your business’ development strategy may include raising funds or securing outside investment, depending on the nature of your organization. Investing in your company might be a risky proposition if the investors don’t know how it will be run. Sometimes, investors may even try to get further rights, such as requiring that certain business decisions be made only after they have been approved by them in advance. Even in the case of considerable or repeated investment operations that dilute the ownership of the initial shareholders, there may be some expectations concerning the decision-making capabilities that the founders should be permitted to use with (or without) the permission of the broader investor group. In these cases, standard company constitutions may not represent the wishes of the business’s founders and/or external investors in terms of voting rights and important decision-making authorities. If you are planning to raise money from outside investors, it is imperative to draft a shareholders’ agreement prior to the start of the fundraising process.
- It will codify the shareholders’ expectations from the business from the outset: Shareholders typically have extensive discussions with their business partners about how they anticipate the firm to function before forming a new company. All of the shareholders are likely to have agreed on how much each of them can contribute to the company’s growth. It’s important for shareholders to put in their time and effort, but what happens if they don’t or can’t? What happens when a shareholder doesn’t (or can’t) do that? Whether or not a shareholder is actively contributing to the company’s success should not be a factor in determining their share of the profits. For shareholders who have “upheld their half of the bargain,” standard company constitutions are typically silent, placing them in a precarious situation. A Shareholders Agreement clearly outlines the expectations of the shareholders for how each shareholder will contribute to the company’s business, as well as a framework for what should happen if things don’t go as planned.
Types of Shareholders’ Agreements recognized in Florida
There are two types of shareholder agreements recognized in Florida. Voting rights are governed by one, while operational matters are handled by the other.
- Voting Agreement: Agreements between shareholders deciding how their shares will be voted are permitted by Section 607.0731 of the 2021 Florida Statutes. For instance, if the corporation is to be dissolved, shareholders must vote to do so at that time.
- Standard Shareholders’ Agreement: The operating procedures of the company are laid out in detail in the general shareholder agreements. Ownership and shareholder rights and duties should be outlined in this document, unlike corporate bylaws.
What happens if you don’t have a shareholders’ agreement?
Both you as a business owner and your corporation might be at risk of future dispute if there is no shareholders’ agreement. In the event of a disagreement, there could be a deadlock if the legal perspectives of each side are not agreed upon. When a shareholder is acting irrationally or in the company’s best interest, this might be troublesome.
Situations, when a company’s voting rights are divided 50/50 between you and your business partner or corporations are extremely risky (which is commonly the case in many private limited companies, particularly in the beginning).
Without a shareholders’ agreement, the following issues might arise:
- Minority shareholders can prevent the sale of their stock.
- Without the other owners’ agreement, shareholders might sell to an unidentified third party.
- There may be disagreements on how to resolve a problem (such as a reluctance to go to court and without an agreement to arbitrate).
- Shareholders might leave the company and start a rival company.
- Without a written shareholders’ agreement, potential investors may be turned off.
- Shareholders may not put the same amount of time or effort into the company, but they will still reap the same financial rewards.
In conclusion, an agreement that outlines the obligations of each shareholder aids the firm in its operations and eliminates conflicts between owners is advised for your corporation if it has two or more shareholders.
If you would like to know more regarding shareholders’ agreements or want a shareholders’ agreement to be drafted for your business, you may seek the advice of our experienced business law attorneys at Walsh Attorneys.