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2 min read - May 30, 2024

Shareholders’ Agreements Part 2: Navigating Buyout Options, Dispute Resolution, and Default Provisions

As your business grows, so can the complexity of relationships, including where the number of shareholders grows. A robust shareholders’ agreement is crucial in safeguarding against unexpected events and ensuring accountability.

In part 2 of our series, "Shareholders’ Agreements: Your Business Toolkit", we explore three essential tools: buyout options, dispute resolution mechanisms, and default provisions.  

By integrating these tools, you will enable your business to navigate and thrive amidst uncertainties.

Buyout Options: Flexibility in Uncertain Times

Buyout options are essential for addressing the departure of a shareholder, whether voluntarily or due to unforeseen circumstances (such as a shareholder’s passing or incapacitation). Typically, these provisions will outline the method and valuation for buying out a departing shareholder's stake, ensuring continuity and stability. Well drafted agreements will provide a pre-determined path for transition, the triggers for such transition and also contain protective provisions to mitigate against disruptive exits and potential conflicts. 

Dispute Resolution: Maintaining Harmony

Disagreements are inevitable in any business. A shareholder’s agreement should always include a clear dispute resolution mechanism that the parties must follow before they litigate - such as mediation or arbitration. These methods offer structured, efficient, private and, usually, cost-effective alternatives to litigation. By specifying these processes, there is the potential to resolve conflicts swiftly, preserve relationships and maintain business focus.

Default Provisions: Preparing for the Unexpected

Default provisions address the ramifications of a shareholder’s failure to fulfil their obligations, which can be clearly defined within the body of the agreement. These clauses define the consequences of such failure and corresponding corrective actions, such as forced buyouts or loss of voting rights.

By having these measures in place, the agreement protects the business from the impact of non-compliance, ensuring all shareholders are accountable and have a common understanding of what is expected of them.

Questions?

Require assistance navigating a complex shareholders’ agreement? Want to explore your options? Something else? Get in touch with the team.

 This article is part of our series, "Shareholder’s Agreements: Your Business Toolkit", providing practical insights to fortify your business foundations.

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