The significance of shareholder agreements in professional services firms

Professional services firms are setting budgets and targets for the following year, assessing emerging talent for promotion to partnership / ownership and generally setting the strategic plans for the next 12 months and beyond.  This is therefore the ideal time for reviewing corporate documents including updating and reviewing shareholder agreements.

What is it?

A shareholder agreement is a legal contract that stipulates the rights and obligations of the shareholders of a company, regulating the management, operation, transfer, and valuation of shares. 

This agreement is particularly essential for professional services firms, such as law firms, accounting firms, consulting firms, and engineering firms, where shareholders are also key personnel delivering services to clients. 

Benefits of shareholder agreements for professional services firms

Shareholder agreements can confer numerous benefits for professional services firms such as:

• Protecting the interests and expectations of the shareholders, who may have divergent goals, visions, and contributions to the firm.
• Establishing clear rules and procedures for the governance and management of the firm, such as the appointment and removal of directors, the allocation of profits and losses, the decision-making process, and the resolution of disputes.
• Ensuring the continuity and stability of the firm, by preventing unwanted or forced exits of shareholders, and by providing mechanisms for the succession and retirement of shareholders.
• A mechanism for the retention of key staff members and the attraction of new talent. 
• Enhancing the reputation and credibility of the firm, by demonstrating its professionalism and commitment to its clients, employees, and stakeholders.
• Reducing the risk of litigation and costly disputes, by providing a framework for the prevention and settlement of conflicts among shareholders.

Key issues to address in shareholder agreements for professional services firms

Shareholder agreements for professional services firms should address the following key issues:

• The admission and exit of shareholders, including the criteria, process, and price for the transfer of shares, the rights of first refusal, the drag-along and tag-along rights, and the buy-sell provisions.
• The valuation of shares, including the methods, frequency, and triggers for the valuation, and the adjustments for goodwill, intangible assets, and liabilities.
• The distribution of profits and losses, including the timing, amount, and form of dividends, the allocation of salaries and bonuses, and the reinvestment of retained earnings for development in technology solutions and acquisitions.
• The management and control of the firm, including the composition and powers of the board of directors, the voting rights and quorum of the shareholders, the delegation of authority and responsibility to the management team, and the reporting and auditing requirements.
• The protection of the firm's assets and interests, including the confidentiality and non-disclosure obligations, the non-compete and non-solicitation clauses, the intellectual property rights and ownership, and the indemnification and insurance provisions.
• The dispute resolution mechanism, including the mediation and arbitration clauses, the choice of law and jurisdiction, and the remedies and penalties for breach of contract.

A shareholder agreement is a vital document for any company, but especially for professional services firms, where the shareholders are also the main providers of the services. 

A shareholder agreement can protect the interests and expectations of the shareholders, establish clear rules and procedures for the governance and management of the firm, ensure the continuity and stability of the firm, enhance the reputation and credibility of the firm, and reduce the risk of litigation and costly disputes. Therefore, professional services firms should carefully draft and review their shareholder agreements and seek legal advice from experts in the field.

We’re here to help

Contact our team of experts today for advice on management of shareholder issues in your professional services firm. We can work with your lawyers to review your shareholder documents and make recommendations as appropriate to have them updated.

To learn more about how to successfully grow your professional services firm, listen to our recent podcast episode on Beyond the Numbers with Grant Thornton, where Craig Lawson and Darryn Hockley explore characteristics and how to navigate growth. 

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