Running a business with others is much like marriage. In fact many will say they spend more time with their business partners than with their spouses. Within that time they will share joy and heartache as fortunes rise and fall and, just like in marriage, the relationship can turn sour as problems develop and differences set root. In marriage we are seeing growing interest in that US import, the Pre-Nuptial Agreement, which sets out how to deal with a parting of the ways without excessive feeding of lawyers. Within companies the equivalent way to avoid disputes and stalemate situations in private companies is to enter into a Shareholders Agreement.
So many problems that come to me as a shareholder mediator would have been very simply resolved had the clients entered into a Shareholder Agreement.
A Shareholders Agreement is essentially a contract in which you all set out, in much more flexible way and in much more detail than in the standard Articles of Association, the relationships and procedures within the company and, importantly, the rule book you want to submit to, in relation to a number of issues that can arise in the future. To give but two common examples:-
* In the absence of a Shareholders Agreement, if a working shareholder decides to walk away, or is dismissed for misconduct, the others usually cannot force him to give up his shares. If they fail to be able to offer a price with which he agrees, he can sit back and collect his share of dividends and any future share of the sale of the company even though he does not lift a finger to contribute to its future growth. Deciding not to issue dividends is no answer as the company will then be forced to pay unnecessarily high levels of tax as drawings will be treated as salary. In a well written Shareholders Agreement, he can be forced to sell his shares to the others at a price determined, in the absence of agreement, by an independent valuer or, if he is dismissed through misconduct, for a nominal sum.
* In the absence of a Shareholders Agreement, if the overwhelming majority of the shareholders, say 90%, wanted to sell to a third party, they could be prevented by the 10% shareholder , who may not work in the business nor make any active contribution to it, refusing to sell his shares. A Shareholders Agreement can contain a clause to force the minority, or say a minority below a certain percentage, to sell.
Other situations that can be covered include:-
Death or incapacity of a shareholder
Relationships between different classes of shares to be issued in the future with varying rights over dividends and voting rights eg for employees
Ownership of Intellectual Property Rights
Agreement on the extent of the business activities - what happens when targets achieved etc
Specific protective rules for minority shareholders
Specific arrangements for meetings and business planning
Information to shareholders (eg investors) not sitting on the Board
Identifying certain Resolutions that you may wish will require higher voting levels to be passed eg 75% or 100%
Specific rules for handling disputes so they are not left to fester or drag you all into the courts
There is in fact no limit to what could be included. In fact the more situations you anticipate and for which you set out clear guidance and rules as to how to deal with them, the less likely it is that a dispute will arise in the first place. If a dispute does arise, the Shareholders Agreement should also set out the manner in which it can be quickly resolved. In this way you can more easily focus more of your time on making the business work rather than arguing amongst yourselves to the possible detriment of the company and your own interests.
Unlike the Articles of Association, which are available online from Companies House website, a Shareholders Agreement is private and cannot be read by the public. It can also be more easily and speedily amended as your business objectives change in time. Importantly for the protection of each individual shareholder, it requires the agreement of all shareholders before being changed.
A well drawn up Shareholder Agreement will also have the advantage of making the company more attractive to investors who do not want to see the company suffer through unresolved internal conflict that could cause possible stalemate situations or simply lead to a lack of teamwork and thus less success.
If you ask us to draw up a Shareholders Agreement, you will be able to access a 34 point questionnaire that will help you inform us of which clauses will be most appropriate for your own Shareholders Agreement. Each question explains the nature of the relevant clauses to enable you to make an informed decision.