09 Aug Shareholders’ Agreements – Why Are They so Important?
You never expect anything to go wrong when you enter into business dealings with relatives and friends. You might even imagine that they will be fair to you should you have a disagreement. Unfortunately, fairness isn’t always at the forefront of a business partner’s mind when something goes wrong with a partnership. It is much better to be prepared for the worst case scenario to ensure that nobody ends up feeling like they’ve been left worse off than the other party or have been taken advantage of.
We all hope that nothing will go wrong but it often does which is why having a shareholder agreement in place is essential. It might feel that asking for a shareholders’ agreement makes you look distrustful and disrespectful but if the day comes that you need it you will be relieved that you put it in place. Remember, if things are split fairly, you have a better chance of recovering you relationship should a disagreement come between you for a time!
You are right in thinking that the company’s articles of association and the Companies Act 2006 with provide you with some guidelines and protection but nothing will protect you as much as an iron clad agreement signed by both parties as it will safeguard both your investment in the company and the business itself if you wish to sell your share or the whole thing at some future point in time.
A well drafted agreement should:
- Provide protection for minority shareholders i.e. someone who owns less than 50% of the shares
- Describe how to run the company i.e. that certain decisions, like appointing new directors, are made by all shareholders so that minority shareholders can participate and are not outnumbered by shareholders with a bigger majority
- Set out rights and obligations of both majority and minority shareholders
- Regulate the sale of the shares and issue of new shares and transfer of shares, paying dividends
It is vital for a minority shareholder to have protection in place because they will not get a say in how the business is run even if their rights are protected under the company’s articles. Don’t forget that articles can be amended by a special resolution where 75% of voting shareholders are required to vote in order to effect a change. Another great aspect of a shareholders’ agreement is that benefits minority shareholders is that when an existing majority shareholder wants to sell their shares, they have to offer them on the same terms to all of the shareholders. This ensures that minority shareholders receive the same return on their investment as the other shareholders.
Majority shareholders rights are also protected under a shareholders’ agreement. They can prevent the minority shareholder from setting up a rival business or from selling confidential information to a rival and prevent them from selling their shares to anyone such as a competitor. If a majority shareholder wants to sell their shares but a minority shareholder doesn’t agree they can be forced to do so by provisions in a shareholder agreement. The majority shareholder can then realise their investment at a time and price that suits them. The equal splitting of fees can also be enforced in an agreement.
If the company is split 50/50 then provision for dispute resolution can be included to help resolve any disagreements thus making court proceedings a final option instead of the only option. If you have to take your business partner to court to solve any disagreements that come up, you may find that it is a long and costly process and could potentially have to be repeated.
We recommend that a shareholders’ agreement be drafted up at incorporation to avoid any hassle and strain on your relationships later on. You may have a myriad of other things going on when you are starting out so consider outsourcing the responsibility to M & N Group Limited otherwise you may never get it in place.
It is also worth noting that this document is not open to public inspection, it can be negotiated and drafted in complete privacy and only viewed by the parties involved. We are specialists in the field and are waiting to advise you on your shareholders’ agreement.
We are competitively priced compared with our rivals who are solicitors and accountancy firms. You can be assured that bespoke drafting is not a challenge for us and we are looking forward to drafting your agreement in a matter of hours. Please get in touch!