Very few people go into business expecting things to go wrong.
However, sometimes life gets in the way and business partners fall out or personal circumstances change. What happens then in the context of a company?
The absence of an agreement between shareholders often results in costly disputes over what rights each person has and how the company is run, valued or funded.
Failure to document arrangements properly can hamper growth, and problems can arise if one party wants to exit the company or on the death of a shareholder.
A shareholders’ agreement provides clarity and peace of mind to all shareholders about what can and cannot be done and what happens when things go wrong.
What is a shareholders’ agreement?
A shareholders’ agreement is exactly that – an agreement between the shareholders of a company.
It sets out the relationship between the shareholders, how the business will be run and what happens if difficulties arise.
Shareholders’ agreements supplement the Articles of Association.
Unlike the Articles of Association which are governed by corporate law, they are governed by contract law and may be amended and ended by simple agreement. Also, unlike the Articles of Association, the shareholders’ agreement is a private document, so does not need to be registered with Companies House or made public.
Why should you have a shareholders’ agreement?
Shareholder deadlock (particularly if accompanied by director deadlock) can paralyse a business.
How shareholder disputes and deadlocks are dealt with can often be resolved and negotiated by careful review and consideration of the Company’s Articles of Association or a written shareholders’ agreement, provided that (i) the Articles have properly been considered and drafted at the start of the relationship and (ii) a shareholders’ agreement exists.
A well-drafted shareholders’ agreement can set out strategies to help resolve shareholder deadlock or deal with the issues that arise when a shareholder decides to sell their interest in the business.
When there is no shareholders’ agreement, contentious scenarios are more likely to arise.
Additionally, there are many situations where the shareholders will not be happy with the standard voting rights in accordance with shareholdings.
For example, a company may be reliant on the skills and knowledge of a minority shareholder, or that shareholder may have lent money to the company.
A shareholders’ agreement provides a more equal distribution of power and protects minority shareholders.
What should be contained in a shareholders’ agreement?
A shareholders’ agreement sets out detailed and practical rules for the company and its shareholders, and should cover:
- Purpose of the company: What is the company’s business plan and what are the expectations of the shareholders?
- Matters requiring unanimous consent: A shareholders’ agreement should explain clearly which decisions can only be made with unanimous consent and in which matters minority shareholders will have veto rights.
- Shares: What are the terms regarding the distribution of any new shares? Consider also what will happen if a shareholder dies, sells their shares or becomes incapacitated.
- Directors: Decide who can appoint and remove directors to the company, as well as which rights of management are delegated to the directors.
- Finance: Set out how the company will be funded and whether there will be an allotment of new shares to raise capital.
- Exit strategies: It is important to outline what provisions will be made when a shareholder wishes to exit, such as whether existing shareholders will have first right of refusal on the shares.
- Dispute resolution: How will disputes be resolved? Will a third party be appointed to arbitrate? Make sure you have clear strategies in place to help to minimise animosity during a dispute.
- Defining the power of shareholders: To what level can individual shareholders act on behalf of the company without consultation and agreement? How can shareholders be prevented from competing with the company and poaching clients or staff?
An understanding of the statutory provisions, the common law provisions and the company’s Articles are all required when drafting such an agreement, along with a clear understanding of the common issues that could arise within the company and the range of possible solutions that could be included.
Prepare for future disputes with a shareholders’ agreement
Disputes internally within a business can be challenging and even have the potential to destroy a good business if not properly dealt with.
At Palmers, we can advise you on how your company might benefit from a shareholders’ agreement and can draft an agreement appropriate to the needs of your company.
If a dispute arises, we can help you implement the dispute resolution strategies laid out in the shareholders’ agreement, ensuring you can resolve matters amicably and get back to running your business.
A shareholders’ agreement is essential for managing future business disputes and protecting the value of your business interests.
For tailored advice on shareholders’ agreements and dispute resolution, contact our company and commercial law specialists today.