The subject of shareholder agreements came up in a conversation with a professional colleague recently and as many of our clients are in business, we felt this was an important subject to include on the blog.
A lot of companies are created between family members and friends based on what starts as a common ideal or objective. However, in the excitement of setting up and running the business, formalising the arrangements can fall down the list of priorities. In fact, where there are close personal relationships, it may even be seen as distasteful or untrusting to request a formal contract between the members. But a business is, after all, a commercial venture and having a formal shareholder agreement in place will avoid all sorts of potential problems and costly legal battles down the line.
What is a Shareholders Agreement?
Simply put, a shareholders agreement protects the interests of all the shareholders by formalising their relationship. It clearly sets out the terms on which the company is to be run and the involvement of each individual member. Even if the shareholders believe they are in agreement on all the important issues, asking some simple questions can be quite revealing.
- What is the strategic direction of the business and do all shareholders share the same long term vision? What if one of you wants to plough the profits back into the business for growth whilst another wants to use the profits to finance their lifestyle?
- What happens if one shareholder decides to leave? Are there controls on the transfer of shares, especially to individuals outside of the company? Have you put measures in place to give existing shareholders first refusal to purchase them? And how will you calculate the share value?
- If the business needs additional financing how will this be secured and on what terms? Is the business able to take on a loan or are you prepared to accept an additional shareholder, or even to finance it yourselves? If so, how much can or will each of you contribute?
- What is the resolution procedure if you just cannot reach agreement on an issue and a serious dispute has arisen?
- If you are in business with your spouse have you considered what should happen in the event your relationship breaks down?
- Do you want to make sure that you should be consulted and have a say in key decisions relating to the company?
All of the above scenarios can have far reaching effects so it’s really important that any business with more than one shareholder has a formal agreement in place. It doesn’t need to be a long and complicated document and your company solicitor will be able to draft it for you. After all, people and circumstances do change, and it makes much more sense to avoid a battle before it even begins.
With thanks to Sue Mann, business contracts solicitor, for providing the information for this article. For more information you can contact her by email at email@example.com or by phone on 0121 246 4437 or 07927 931 937. She is also on LinkedIn and Twitter @SueCBLMann.