10 good reasons to have a Shareholders Agreement

Anyone who’s set up their own business knows what a heady mix of excitement and trepidation that inspires. Embarking on a joint venture with a friend or business partner requires constant commitment and cooperation for a chance of success. Much like entering a marriage contract, nobody wants to consider what might happen if things were

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Anyone who’s set up their own business knows what a heady mix of excitement and trepidation that inspires. Embarking on a joint venture with a friend or business partner requires constant commitment and cooperation for a chance of success.

Much like entering a marriage contract, nobody wants to consider what might happen if things were to turn sour. At Darlingtons Solicitors we can tell you that even the best laid plans can and so often do go wrong. Whilst a prenuptial agreement may sound unromantic and ill-boding, it offers the best protection to both parties’ interests. A Shareholders Agreement is the commercial equivalent. A well drafted agreement serves as a go-to manual in the event of doubt or dispute and can save you valuable time and expense at a later stage.

If you’re still not convinced, here are 10 compelling reasons your business will benefit.

Dealing with shareholder disputes

How do you deal with disputes down the line once views diverge, circumstances change and resentment builds? It is far easier to formalise provisions at the outset. A Shareholders’ Agreement can lay down at what stage there would be a referral to mediation or include exit strategies for shareholders to part ways should it come to that.

The efficient way to run your business

Wouldn’t you want control over the major decisions your company takes? Whilst most mundane decisions are usually left to the discretion of the board, majority shareholders often want a say in the more material matters taking place. Decisions such as whether to issue further shares or bigger expenditures can be drafted into your shareholder agreement as those requiring consensus or the consent of specific shareholders.

Don’t rely on company law

How about flexibility? Whilst companies are ordinarily strictly subject to company law, a shareholders’ agreement can vary your legal position via alternate provisions. For example, a varied dividend policy can allow for different dividends to be paid according to the class of share held or an additional clause could restrict who may or may not acquire shares. A Shareholders Agreement may also include “tag along” provisions to enable a minority shareholder to “tag on” to a majority shareholder in a share sale situation.

Finance and investment

What better benefit can an agreement provide than helping you raise finance from banks, creditors or other potential partners that may be looking to invest in your company? A Shareholders Agreement points to a solid business structure, inspiring the trust and confidence of others.

Employee shares

Shares in a company are often held by directors or key employees of the business but what if they resign or leave? More than likely you would want them to have to sell their shares otherwise they could still be entitled to dividends. A Shareholders Agreement can ensure that an individual’s shareholding is linked to their employment so that in an exit event the departing employee is forced to offer their shares up for sale.

Non-compete clauses

Wouldn’t you be worried about an exiting shareholder transferring to a competitor or setting up a competing business? Restrictive clauses in a Shareholders Agreement can be stricter than in any employment contract and provide a means to protect your company moving forward. 

Confidentiality

Is discretion a priority? Unlike your Articles of Association which is on public record at Companies House for all to see, Shareholder Agreements remain private and confidential and will not be viewable by creditors or non-member employees.

Deadlock is not a good thing

A very significant number of limited companies are started with only 2 shareholders or alternatively perhaps 3 or 4. In many cases, the shares are allocated so as to create parity in terms of power, control and blocking rights. It’s very common to see a business where the set up is on a 50:50 basis.

This is entirely understandable but in the event of a disagreement where a clear process and route to break deadlock is mapped out clearly, the resulting deadlock often creates very real damage to the company and in some cases even business failure. A well thought out and drafted shareholders agreement can avoid this.

Plan for the future

Whilst many companies are set up as small family businesses or quasi partnerships, things change. Relationships change and business needs change. You may need or want outside investment as 1 example. Having a shareholders agreement in place at the outset helps shareholders to think about the possibilities going forward and to create flexibility in the agreement to deal with possible changes as the business grows.

Protect minority shareholders

This is always an important consideration. Company law provides scant protection, so if you are a minority shareholder, negotiating some enhanced protections should always be high on your agenda and getting any agreed additional protections clearly included in a shareholders agreement.

If you don’t already have a Shareholders Agreement in place, let us draw it up for you today.  We offer competitive costs, a quick turnaround and a professional and customised service to accommodate all your business needs.

 

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