The business you have built over the years is an asset of your estate.  You may wish to pass on the business to your beneficiaries under your will or put in place an appropriate exit strategy for them.  To keep the process of probate simple and easy for your beneficiaries, you need a good shareholders’ agreement.

The law changes.  Best-practice changes.  The economy changes.  Your business changes, and your personal circumstances change.  Your legal setup needs to be reviewed regularly to ensure that it keeps up.

As your legal documents age, they might not be protecting you the way they once did.  For this reason, every business should regularly check and update its legal documents to ensure compliance with new laws, and protection against new threats, as the business grows.

Some people do not have anything in place.  In the rush to get their business up-and-running, many people overlook putting in place the essential legal documents.

 Shareholders’ Agreement – the most important agreement you may ever sign

These are the issues to address with your business partners in a shareholders’ agreement:

• • Who are the equity stakeholders?
  • What are their voting rights?
  • Who gets to appoint a director?
  • How will important business decisions be approved?
  • What restrictions should apply to selling shares and raising more equity capital?
  • How will disputes be resolved?

 

You pass on to your family or beneficiaries the set up and shareholders’ agreement you leave behind.

As soon as your business has more than one owner, you need one of these, and this may turn out to be the most important contract you ever enter into.  A proper shareholders’ agreement governs how important business decisions are made, how the company will raise further capital in the future and how the investors will ultimately exit the business – all crucial matters about which there should be clear agreement in advance.  Set out the rights of one shareholder against another, both majority and minority owners will want a comprehensive agreement to protect their interests and investment in the company.

A proper Shareholders’ Agreement will govern how important business decisions are made, how the company will raise further capital in the future and how the investors will ultimately exit – all crucial matters about which there should be clear agreement in advance.

Of particular importance will be pre-emption rights on new issues of securities, which help to prevent the investors from being diluted by future capital raisings, as well as pre-emption rights on transfers of shares or securities to give the investors certainty about the particular individuals with whom they are going into business.  Tag-along and drag-along rights can also prove to be crucial when one or more of the owners are seeking to exit the business.

Creating a shareholders’ agreement for your business will force you and your co-investors to sit down together and address these vital points upfront.

Death or incapacity of a shareholder

Should the death or incapacity of a shareholder trigger a right for the other shareholders to buy out that shareholder?   If you choose to add buy/sell insurance provisions into the shareholders’ agreement, then death/incapacity should be added as a trigger event requiring the affected party to offer its shares for sale to the remaining shareholders.

What is buy/sell insurance?

In short, life and permanent disability insurance is taken out in relation to the shareholders at the cost of the company. The company pays the insurance premiums.   Then, if the estate or ill shareholder is required to offer its shares for sale to the remaining shareholders as a result of death or permanent disability, the proceeds of the relevant insurance policy are used to assist the remaining shareholders buy those shares.

It can be effective protection for a vulnerable spouse or beneficiary.  It is an exit strategy benefiting you and your family should something unexpectedly happen to you and helps the remaining shareholders buy you out promptly while preserving business continuity.  The directors determine the amounts for these insurance policies from time to time with the consent of the majority shareholders.