Else Solicitors Answer: “Why Do I Need A Shareholder Agreement?”
Find out what advice our experts at Else gave when they were asked “Why do I need a shareholder agreement?”
Are you planning to go into business together with one or more other people? Or have you started already?
It’s an exciting time, full of energy and positive thinking. We wouldn’t want to put a dampener on any of that.
However, our experts have outlined eight reasons why you really need a shareholder agreement when going into business with other people.
1, YOU ARE TOO BUSY
Shareholder Agreements. Sounds very official doesn’t it? You’re probably thinking that’s something you don’t really have time for right now?
“Maybe jump that fence when you get to it…” That is the attitude many co-owners of businesses take.
However, when they do finally come to jump this particular fence, they find it has become an awful lot bigger than they expected. It might even be insurmountable!
Many companies begin thinking about shareholder agreements because something has happened that forces the issue. Usually a dispute.
Once you’re in that situation you will negotiate between two or more aggrieved parties to find a compromise and you won’t have any contract to turn to for guidance.
A shareholder agreement conveys how to resolve the issue and what to do if a resolution cannot be found.
Putting together a shareholder agreement is a lot more difficult when it is essentially an exercise in conflict resolution.
2, THAT WOULDN’T HAPPEN TO YOU? THINGS CHANGE!
Perhaps you are thinking it is not likely to happen because you and your fellow shareholders are all nice, reasonable, people and you all see eye-to-eye as far as the future of the business is concerned.
That is what everyone thinks at the beginning. As a business develops things can change. People change too. Some end up wanting more, others can decide to back away. Quite often, as more opportunities open up, people begin to have different ideas about the direction of a business.
This is why these early days are the ideal time to take a step back and ask some serious questions. “What happens if we don’t agree? There are only two of us and we own the shares 50/50 so how can we resolve a dispute?”
At Else we advise all our clients to have a structured process to work to in order resolve a dispute.
Here are some common issues that occur time and time again, affecting companies that have not planned for them.
Without an agreement to the contrary, shares may automatically transfer to the spouse of a shareholder on their death.
A shareholders agreement can provide for a right of first refusal for the remaining shareholder(s).
All parties should also have up-to-date Wills that work alongside and mirror the shareholders agreement and articles of association of the company.
Without a shareholders agreement in place, the question of “who gets my shares if I die or cannot work” may not be an easy one to answer, or the answer may well be unsatisfactory.
With around 40% of marriages ending in divorce, it is highly likely that at least one of your company’s shareholders’ relationships will end.
A good shareholder agreement will stipulate if the ex-spouse of a shareholder is entitled to hold shares.
If you do not have an agreement the remaining shareholders could be left with a shareholder who does not have the best interests of the business at heart.
5, SELLING SHARES
Without a shareholders agreement in place, a shareholder may be able sell their shares to anyone, even a competitor.
A shareholders agreement can give shareholders the right of first refusal should any shareholder wish to sell their shares.
If nobody takes up this right, the shares can then be offered to third parties, but only ones who are approved by the shareholders.
A formula for working out the sale price for shares can also be included in a shareholders agreement.
This could be another area for potential conflict and can be easily resolved if a valuation formula already exists.
Who has the authority to spend or borrow money on behalf of the company? Who can enter into contracts on behalf of the company?
Without a shareholders agreement in place any shareholder could make such commitments on behalf of the company without agreeing this with the other shareholders.
7, DON’T GENERALISE
Every company is a unique and every company needs a shareholder agreement that addresses its individual circumstances.
The contents of a shareholders agreement needs to be bespoke and tailored to the needs of the parties involved.
8, HOW TO AVOID FUTURE PROBLEMS – ACT NOW!
Those are just some of the situations that can easily arise and cause real difficulties for a company as it grows. They can all be avoided by having a thorough agreement in place.
Else can create a shareholder agreement for your company that protects its interests and help it to achieve its objectives.
These things don’t have to be complicated if you address them now.
For more detailed legal advice about shareholder agreements, please contact Chris Else on 01283 526200 or email email@example.com. Alternatively, you can send us a message and we will get in touch at a time that suits you.