Agreements can remove the potential for conflict following a dispute
We live in an era where it is now fairly commonplace for prospective newlyweds to consider taking out prenuptial agreements before they get married so it’s still a bit surprising to see the number of businesses where shareholders’ agreements are not equally as common.
A “prenup” is there to protect newlyweds and their assets if something “goes wrong” at a later date and a shareholders’ agreement is ultimately the business equivalent of this.
Imagine this scenario, you have two people that enter into business with each other, they set up a limited company and become directors and equal shareholders. They run a successful business for 10 years employing staff, owning assets and, of course, incurring liabilities.
One day they have a disagreement about the direction of the business which they are unable to see eye-to-eye on, nor are they able to reach an amicable agreement.
They decide to go their separate ways but are unable to agree on what to do with their current business.
Given the falling out between the two parties, neither are prepared to back down and the business reaches a deadlock because it cannot hold a valid meeting of shareholders in order to resolve what to do with the business, and the articles of association do not provide for what to do in these circumstances.
The employees of the business are unable to be paid as both directors are joint signatories and are not in agreement, and the assets are unable to be dealt with for the same reason.
In my line of business, I’ve been called in to advise on many situations like this where amicable actions to deal with the business are unable to be taken.
Unfortunately, in most cases, by the time the query reaches me, the business and its shareholders have been through such a volatile journey that the relationship has been damaged beyond repair.
Typically, in these situations the company only has the standard Articles of Association in place and breaking the deadlock ends up being a costly, and sometimes impossible, feat.
Having a shareholders’ agreement in place at the outset would have set the parameters on how to deal with a deadlock.
A shareholders’ agreement is also an opportunity to set out in writing factors such as how the company will be managed, what the duties and responsibilities of the shareholders are, the dividend policy, the process for the transfer/sale of shares, voting rights of shareholders, non-competing clauses, and provisions for preventing both director and shareholder deadlock etc.
The added benefit of a shareholders’ agreement is that having things like this set out clearly removes the potential for conflict as everyone knows the playing field rules.
So, my advice to anyone who is a shareholder in a business, whether you are a minority or a majority shareholder, if you’re in business with your best friend, spouse, family member or even priest, please do yourselves a favour and get a shareholders’ agreement in place – while you’re all getting on!
You can still set up an agreement if your business is already trading and you don’t have to have millions of pounds of turnover (in fact you can set it up before you start earning any money at all!).
Shareholders’ agreements are fairly inexpensive to set up and they can save you a lot of money and heartache, if things go wrong further down the line.