Top 5 mistakes made in shareholder agreements

Common mistakes in shareholder agreements

Even if nothing goes wrong and relationships remain strong, the risk is ever-present. With that in mind, here are the five most common mistakes made when drawing up shareholder agreements. 

Using a template

A quick fix to a document that would usually take up hours of time, multiple conversations, and, in many cases, disagreements until a general consensus is found? Yes, please.

No thanks. Templates are designed to be as broad and unspecific as possible, or they wouldn’t prove ‘useful’ to 99% of the people who use them. As with DIY wills, shareholder templates appeal to people who don’t want to be bogged down in the thought process – who want to rush out the formalities and move on. 

But there are some things that can’t be ‘rushed out’, and no quick fix to drawing up a shareholder agreement is worth the time it takes to complete. You’ll need to collaborate with your corporate solicitor to ensure every salient point is acknowledged. 

Not formalizing it

It’s all well and good to sit around a table with your shareholders and agree about how the business should be run, and what rights and obligations shareholders should have, but that means nothing if you fail to write it down.

Verbal agreements may work in some instances, but there is very little room for them in business – not if you want to secure the business’s future. Formalize every agreement, or they won’t count as agreements in the future.

Not considering the long-term

In the beginning, it’s easy to fixate on the early days of a new business. The bigger picture feels too big to really take in, and narrowing your focus on its fledgling stage is the best way to combat a sense of vertigo.

But the shareholder agreement is a document that should see you through many years of evolution and development. If it’s written up according to that narrowed focus, there’s a good chance it won’t be so useful or beneficial to the business a few years from now. Your solicitor will be best placed to help you to address the long-term. 

Failing to account for the death of a shareholder

It’s not nice to think about, but the unexpected death of a shareholder can have a major impact on the business. Will the shares pass onto a member of their family, or will you make provisions in the agreement to ensure that their rights can be bought out by other shareholders? 

Not having one

Conclusion

Even though it might seem like another thing to do, a company’s legal issues should be resolved as soon as possible, because it often happens that external factors affect the company’s operations and lead to unwanted consequences. 

We hope that here we have explained well the top common mistakes that happen in shareholder agreements and that you will be careful about what to look out for in the future.