Shareholders' agreements: A necessity or a luxury? Helen Howes of Willans LLP
Whether you are a small company with two shareholders, or a larger business with multiple shareholders, it is hard to overstate the importance of having a properly drafted shareholders' agreement, explains Helen Howes of Willans LLP solicitors.
Why do we need a shareholders' agreement?
We understand that many business owners see a shareholders' agreement as a luxury and an unnecessary expense. However, failure to put such an agreement in place means that there can be greater uncertainty if an unexpected event, or a dispute between shareholders, were to occur.
In the absence of an agreement, it will be much harder (and far more expensive) to resolve issues or disputes that arise between shareholders.
A significant benefit of having a shareholders' agreement drawn up is the process itself. By encouraging the discussion of key issues between shareholders, potential areas of disagreement or misalignment can be identified at an early stage and it may be possible to find and document solutions through the shareholders' agreement.
Discussing, for example, how long shareholders are intending to be involved with the company (i.e. whether they see their shareholding as a long-term investment or whether they are looking to grow the company rapidly and exit within a matter of years), what should happen if a shareholder wants to sell their shares or what should happen if something unexpected were to happen to a shareholder, will help to identify any differing expectations. From there, it may be possible to align the shareholders' expectations through the shareholders' agreement.
What does the agreement cover?
It is very important that a shareholders' agreement is a bespoke document, drafted to address the specific needs of a particular group of shareholders. For example, the agreement can be used to:
- limit the decision-making discretion of the board of directors;
- set a dividend policy;
- put in place procedures which must be followed if a shareholder wishes to transfer their shares;
- protect minority shareholders' interests by placing restrictions on dominant shareholders;
- include mechanisms to recover the shares from a shareholder in certain circumstances (such as their death, bankruptcy, or simply ceasing to have an active role with the company); and
- restrict a shareholders' activities, both while they are a shareholder and for a period after they leave, to protect the company's interests and limit the ability for shareholders to be involved with competing businesses.
Our business has been trading for some time now, is it too late to put an agreement in place?
Not at all. If things are going well and the business is running smoothly then it will be beneficial to lay down in an agreement those mechanisms that are assisting the business' success in order to protect it going forward.
In any event, we always recommend that shareholders' agreements are revisited regularly to ensure that they remain fit for purpose (particularly as businesses grow and their shareholder base changes).
Is it expensive?
In our experience, most shareholders' agreements are put in a drawer and forgotten about, until a shareholder wishes to exit or a dispute arises. It is at this point that the cost benefit of having it in place is really appreciated, as the parties have already agreed how that exit or dispute is to be dealt with. In turn, this helps avoid litigation which can be costly and damaging.
This is an example of where a little preparation and initial outlay can save a lot of time, money and stress - whilst importantly protecting both the company and shareholders' investments.
Need legal support or advice?
Willans' specialist teams are on hand with practical, clear legal support, whatever challenges your business may face in the months or years ahead.
We can assist by providing advice on any of the matters mentioned in this article, for example resolving a shareholder dispute or preparing a shareholders' agreement.
To access help or support, contact Willans, or call 01242 514000.
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