INSIGHT: Shareholders’ Agreements – what every business person needs to know

Posted on February 26, 2016

Do you run a business as a limited company or are you thinking of setting up a company? Have you considered what would happen if you were to fall out with your fellow directors or shareholders?

What is a shareholders’ agreement and why do you need one?

When “A-list” celebrities get married, many will have entered into a prenuptial agreement (prenup) before tying the knot. Most people would agree that this is a good idea: a life in the public eye can put pressure on a marriage and it is prudent for each party to protect those assets accumulated before the union.

So why is it that, so often, when people come together in a new business or joint venture, the sole purpose of which is to generate wealth, they do not enter into a formal agreement on how the business is to be run or how their relationship can be terminated fairly?

For those setting up or running a limited company, the equivalent of a prenup is a shareholders’ agreement. A shareholders’ agreement contains provisions about managing and appointing directors, transferring shares, dealing with loans and investment monies, voting rights, termination provisions, confidentiality, resolving disputes and much more. Advance agreement on such issues between fellow business people sets out a clear procedure to follow in certain common business situations. This in turn, reduces the scope for future disagreement.

It is true that prenups are more common amongst A-listers than the average man on the street. However, all those who want to start, join or expand a business should put a shareholders’ agreement on their checklist as a priority.

Some common excuses for not having a shareholders’ agreement

We are often instructed to help people resolve their business disputes. When a business relationship does break down, the following reasons are repeatedly given as to why the parties did not enter a shareholders’ agreement: the shareholders:

are related
were good friends
trusted each other
didn't want to pay for "unnecessary" documentation
didn't want to focus on potential future problems when the business had just started trading

When the business is just starting, it can be uncomfortable to suggest putting a shareholders’ agreement in place when everyone is getting along. But consider how much worse it might feel later to sort out a dispute without the benefit of an agreement telling you what should happen in the situation.

The lack of a proper agreement in the event of a disagreement often means that the parties become entrenched in their own views about what should be done: their positions become deadlocked. Or, they find themselves tied to each other in an unequal relationship - with no way out unless they can agree what the company is worth.

Unfortunately, when these types of business relationship disintegrate, they are often emotive and highly charged and these factors make reaching any agreement at this later stage more difficult and distressing – and more expensive.

Have you considered a shareholders’ agreement?

Whether you are a shareholder in an established business or about to be, you should consider carefully what will happen to you and the business in the event of a fall out with your fellow shareholders.

Read our checklist

We have prepared a ‘top tips’ checklist that explains:

what a shareholders’ agreement is
when it is needed
what it should contain
how its terms can protect all parties and supplement the terms of a company’s Articles of Association and can also assist minority shareholder in protecting their rights.

If you have not considered a shareholders’ agreement before now or not taken legal advice on your position relating to your new or current business venture, our checklist will make interesting reading. If you would like a copy, please email Keith Kennedy on keith.kennedy@pearsonlegal.co.uk.

“If the horse hasn't already bolted you should give serious thought to putting a shareholders' agreement in place to shut that barn door! Even if it sits in a drawer for years gathering dust, it is a much cheaper and pain free alternative to leaving things to chance.” (Keith Kennedy)

If you are not sure whether you need a shareholders’ agreement or would like advice on how to protect your company and manage shareholders, contact Keith Kennedy on 0161 785 3500 or email keith.kennedy@pearsonlegal.co.uk. Keith can advise you on the best strategy to obtain the optimum outcome for you.

Already in a shareholder dispute?

If you are in the middle of a dispute with a business partner and thinking “I wish I’d seen this article a couple of years ago,” contact Christopher Burke in our dispute resolution team. Christopher can assess your position and help identify the best way to resolve your issues. More information can also be found here.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.