Why you should have a shareholders’ agreement

Whether friends or family, when you go into business with someone the dynamics change. Your relationship changes from just the personal, to personal and business – you’re accountable to one another.

Why do a shareholders’ agreement?

A shareholders agreement sets boundaries and establishes guidelines on how your business relationship and commitments are going to work: it can also help avoid fallouts and deadlocks.

What’s in one?

A shareholders’ agreement is a private contract between the individual shareholders and the company. It can, and should, be tailored to you and your business needs but typically includes:

• A good faith provision – each person agrees to act in good faith towards one another – we receive frequent enquiries where one party has done something the other considers unconscionable!
• Restricted decision making – the Companies Act 2006 only requires certain decisions which primarily relate to the company’s constitution to require shareholder consent. Subject to these few decisions, without a private agreement, decision making is generally vested in the directors and although decisions should be made at a board meeting certain decisions or practices may fall outside of this. Inclusion of a decision-making clause will establish some contractual boundaries on decisions that would require a majority, or unanimous, shareholder consent, e.g. borrowing money, incurring significant capital expenditure etc.
• Pre-emption rights on transfers – this clause is crucial. Shares are an asset and therefore it is open to anyone to sell that asset at their discretion. This can lead to unfortunate consequences, where you are not in business with the person that you thought you were (typical scenarios being death, bankruptcy or incapacity). This can be addressed by requiring the shareholders to offer shares to one another first, otherwise, you may end up working with a competitor, or a grieving spouse or relative.
• Deadlock – one of the biggest issues arises when share- holders fall out and there is no resolution mechanism. Pre-agreeing what procedure you will follow to resolve a dispute can be key in resolving it.

How much will it cost?

As shareholders’ agreements should be amended to (and specific to) your needs so the cost varies from client to client, but an accurate estimate is always provided, and paying for a shareholders’ agreement is typically far cheaper than engaging in litigation or dispute resolution if you fall out!

If you want to know more about shareholders’ agreements, contact Holly Threlfall at hthrelfall@wilsonbrowne.co.uk or any member of the Corporate & Commercial Team at Wilson Browne Solicitors. Find out more at www.wilsonbrowne.co.uk