Many people embark upon business enterprises with family members or friends. Often those businesses are conducted through a partnership or a company.

Where the business is conducted by a company the Constitution of the company governs the rights and entitlements of the shareholders and obligations of the directors. However, the Constitution usually doesn’t take into account specific arrangements between the shareholders and the rights and obligations of the shareholders amongst themselves.

Our experience over the years has shown us that in the absence of a Shareholders Agreement many issues arise between the shareholders which could have been avoided if they had been given consideration at the time the business was established. Quite often, many of the disagreements which occur between shareholders and ultimately result in bitter disputes start out from genuine misunderstandings between the shareholders. In a particular set of circumstances one shareholder will genuinely think that a certain course of action will be taken and another shareholder genuinely believes a different course of action would be undertaken. If they discuss this at the outset when everything is fine between them, an agreed course of action can be documented and the potential for misunderstanding avoided.

We encourage our clients to sit down with their prospective business partners and have a properly constructed Shareholders Agreement prepared. The costs involved in doing so pails into insignificance with the emotional and financial costs that can arise in the event that the business relationship falls apart. As most business ventures involve people who are friends or family, quite often the breakdown of the business relationship also results in the breakdown of a family or personal relationship.

In addition to the emotional cost, quite often there are large legal expenses incurred in sorting out legal issues associated with the dissolution of the business. The time and cost involved in sorting out a legal mess in those circumstances far outweighs what would have been a prudent investment in having a properly prepared Shareholders Agreement set up in the first place.

One of the important aspects of a properly drafted Shareholders Agreement is to provide a process for the departure of one shareholder (either suddenly through ill health or death or a planned retirement) in such a way so that there is a smooth transition of the business and funds may be available to pay out the outgoing partner or their estate.

Our commercial lawyers at Solari & Stock are able to guide and assist you through the process of discussing the relevant issues to be addressed in a Shareholders Agreement and to prepare a comprehensive Shareholders Agreement protecting the rights and obligations of the shareholders and the business.

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