Your Business Partner Is Your Friend. Do You Still Need a Shareholders’ Agreement?

You have known each other for years. You trust each other. You have a great business idea and are ready to build something together.

So why spoil the mood by discussing what happens if one day you disagree?

It may feel a little like asking your beloved to sign a marriage agreement just before exchanging rings at the altar. Not particularly romantic — but sometimes very sensible.

The same applies to business.

Many companies start with plenty of enthusiasm, ambitious plans and surprisingly few rules. While everything is going well, this may work beautifully. The interesting questions usually come later.

What happens if one shareholder wants to sell while the other wants to stay? What if one wants to distribute profits as dividends while the other wants to reinvest everything into the business? What if the company suddenly needs additional financing and only one shareholder is willing — or able — to provide it?

And what happens if the shareholders simply cannot agree on an important business decision?

Or, in the Thai context, if one of them announces one morning:

“I’ve had enough. I’m moving to Phuket.”

This is where a well-drafted Shareholders’ Agreement becomes particularly valuable.

Agree on the Rules While You Still Agree

A Shareholders’ Agreement is not a sign of mistrust.

Quite the opposite: the best time to negotiate the rules of a business relationship is usually when the relationship is good and everyone is looking in the same direction.

Depending on the company and its ownership structure, a Shareholders’ Agreement may regulate matters such as:

• Management and voting rights
• Decisions requiring the approval of all or certain shareholders
• Additional financing of the company
• Dividend policy
• Restrictions and procedures for transferring shares
• Rights of shareholders wishing to exit the business
• Procedures for resolving a deadlock
• What happens if the relationship between the shareholders changes

These questions become particularly important where the shareholders contribute different things to the business — for example, capital, local market knowledge, technology, intellectual property, management expertise or business contacts.

An Important Point for Foreign Investors in Thailand

For companies involving foreign shareholders, the Shareholders’ Agreement must also fit within the company’s overall legal structure and comply with Thai foreign ownership rules.

Contractual arrangements cannot be used to disguise nominee shareholding or to give a foreign investor rights that are inconsistent with the actual and lawful ownership structure of the company.

This is why a Shareholders’ Agreement should not be drafted in isolation. Ideally, it should be considered together with the company’s Articles of Association, shareholder structure, foreign ownership restrictions and the practical way in which the business will actually be managed.

A Small Investment Before a Potentially Big Problem

Consulting a lawyer and putting appropriate rules in place at the beginning of a project may not feel like the most exciting part of starting a business.

But it can be one of the best investments you make into your project.

After years of corporate legal practice, one principle remains remarkably consistent: preventing a business dispute is usually much easier — and considerably less expensive — than winning one.

Good agreements are not written because business partners expect to become enemies.

They are written while they are still friends.

“We trust each other.”
Excellent. Now is probably the perfect time to agree on the rules.