When it comes to shareholders agreements, there are 2 types of clients, those that have them and those that don’t!
Most clients in small businesses don’t want a shareholders agreement which becomes excessively complicated or which seeks to deal with every possible contingency. There is a balance to be struck with what’s obviously important and practical, and this includes cost effectiveness.
What I can say, from a lot of experience, is that invariably, not having a shareholders agreement will result in a business spending more on legal fees not less and, at worst, it can be the death knell of an otherwise flourishing company.
No shareholders agreement – a recipe for a deadlock
I recently met with a new client who set up a business a short while ago. The business was owned by a limited company in which they each owned 50%. There was no shareholders agreement in place and they unfortunately realised (after investing a significant amount of time and money into the company) that their business styles were not compatible and they could not work together.
The problem they were faced with is neither could make a decision without the agreement of the other due to the equality of their shareholdings, they couldn’t move forward with the business and make any decisions with regards to how the business was going to be run on a day to day basis. A deadlock had arisen.
Resolving shareholder deadlock
My client wanted to know how to resolve this in the quickest most cost effective way. There are a number of options to resolve a 50/50 deadlock situation between shareholders including :-
- Mediation between shareholders – the first step would probably be to consider mediation. It can often help to have a clear headed independent third party help you reach a sensible solution that all the parties can live with.
- Get a shareholder agreement in place – if the relationship has not broken down irretrievably they could consider having a shareholders agreement put in place which would include defined parameters as to how the company is to be run going forward and what should happen if a further deadlock were to arise in the future.
- Get an additional new shareholder into the company – alternatively they could invite a third party to come into the company as a shareholder and director to ensure that a deadlock doesn’t arise in future.
- Wind up the company – if the parties really feel that they can’t work together, if the company is no longer viable they could set the wheels in motion to have the company wound up and the assets distributed to the parties or sold ad the proceeds distributed.
- Sell the company or buy out the other shareholder – if the company is viable the shareholders could consider selling to a third party or indeed selling their share to the other party. If both parties want to buy and neither wants to sell what can they do? If the shares are held on an equal basis and the company run by both of them it may be that in fact the Company is a quasi partnership and in the event of deadlock
- Court action to resolve shareholder deadlock – there may be no need to argue merits in terms of a deadlock, just that a deadlock has arisen. An order sought would be “winding up or such other order as the court thinks fit” in all the circumstances. If one party wants to buy the court may well order a transfer of shares at value and may order a valuation if a value is not agreed. The court will want to preserve the business if one party wants to buy however if one would rather have the company wound up than let the other shareholder purchase the shares a court would not look kindly on that. If both parties want to purchase a court may consider the merits and could even order sealed bids be made.
It’s an expensive business trying to sort out issues such as these, it is much more cost effective to have a valid shareholders agreement in place to deal with such issues as they arise.
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