Is a Shareholder Agreement about Shareholder Trust?

More often than not business relationships are founded on absolute trust between the owners of the business. So much so that it seems unthinkable that a formal Shareholders Agreement is necessary. There is absolute Shareholder trust and the owners are all 100% committed to the business and believe that there is no conflict that can stand in their way. In fact, more often than not, shareholders in the business start as very close friends. The Shareholder Trust is really strong.

Of course there are lots of very complicated reasons for a Shareholders Agreement. This article looks at the very simple everyday reasons why it is important to have a Shareholders Agreement.

Circumstances Change

Lets start with a simple fact – circumstances change. Unfortunately, people get sick and inevitably they also die. When that happens it is vitally important that everyone understands what will happen to the shares that are held by the estate of the shareholder that died. Do the shares pass on to the family of the shareholder, or are they automatically sold? If they are sold, at what price? For most small businesses, the shareholders are also involved in the business on a day to day basis and it doesn’t work to have passive shareholders. Also, while you may really enjoy your relationship with your shareholders, you may not feel quite as good about being in business with his or her wife. A Shareholders Agreement protects the business. It also protects that Shareholders by making sure that they know that their estate will get full value for a lifetime of work.

Young Blood and BEE

Another important factor for small businesses is continuity. If you are interested in bringing young blood into your ownership structure, then it is important to manage expectations. For many new shareholders, they may think that they have hit the jackpot. Real life is much more complicated and shareholders generally get paid last. If expectations are not clear, the new shareholder ends up being demotivated.

Black Economic Empowerment ownership structures are an important part of business in South Africa. Your BEE auditor will require you to have a written agreement. More importantly, your new shareholders should be made aware of how and when they will benefit and also, how they can realise their investment.

Who pulls the strings?

Although most businesses function in a collaborative way, there are times when tough decisions require a voting process. The mechanics for how these meetings take place and the voting process is important. Sometimes, you will want to ensure that the shareholders are consulted (as opposed to the directors).

Above all, it is important to understand that disputes between Shareholders are extremely damaging. They can also be very expensive. A carefully drafted agreement will drastically reduce the scope for disputes.

Stuart Harris, BA LLB LLM

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