People often say that the best way to lose a friend or break relationships with your relatives is to start a joint business. It may be partially true as people often do not think how to manage and preserve their relations as business partners. When disputes among shareholders arise, the often reasons are the misunderstanding of mutual agreements or the absence of appropriate agreements regarding major issues including the disputed one.
At the time of starting business people tend to think only about business promotion leaving other aspects of the business for the future and relying on good personal relations with partners. Unfortunately, arrangements made verbally might be vague, people often forget them or interpret them in their own way. Without written agreements, business partners may easily neglect to discuss and take appropriate decisions on important arrangements which may lead to painful breakdowns and have the substantive adverse effect to the business.
The shareholder’s agreement is a very helpful tool which guides shareholders in many important aspects and helps to avoid above-mentioned difficulties. It is usually structured in a way acceptable for all shareholders and balancing shareholders’ powers. In particular, the shareholders agree who will be directors and officers, how they will be nominated, how important business decisions will be taken, how to solve disputes among shareholders, what’s the procedure of exiting the business and so on.
Various mechanisms of selling the shareholder’s interest in business exist such as Rights of First Refusal”, “Rights of First Offer”, “Drag-Along Rights”, “Tag-Along (Piggyback) and etc. The agreement also may describe the procedure of exiting the business in case of shareholder’s insolvency, divorce, bankruptcy, the conviction for a criminal offence, death and etc.
It’s well worth to make a shareholder’s agreement with business partners as soon a decision to start a new business is taken!