A question frequently asked by people going into business for the first time is “Should we have a Shareholders’ Agreement?” A Shareholders’ Agreement is a private contract between some or all of the shareholders, which is of particular importance for the company. It controls the relationship between the parties, and sets out their contractual obligations to each other. It also varies and enhances the public rights of the shareholders, which are set out in the company’s Articles of Association.
Scenario: the importance of having ‘Shareholders Agreements’ and ‘Business Wills’
We recently had a client who wanted to take two additional shareholders into the business and there was no Shareholders’ Agreement in place. We advised that it was essential for the shareholders to have a Shareholders’ Agreement. Furthermore, we advised that the shareholders should take out share capital protection and key man insurance policies, and that all of the detail should be mirrored in the shareholders’ wills also referred to as ‘Business Wills’. This would ensure that, in the event of the death of a shareholder, there would be enough money for the business to pay the deceased shareholder’s next of kin (in this case their wife) for the value of their shares, the business would have enough money to pay for finding a replacement, and the widow would quickly be able to get some money for their husband’s shares.
In this case, the client did not take our advice, as they thought the cost was too high, and they thought the scenario envisaged would “never happen to me”. Unfortunately, a year later one of the shareholders died and the remaining shareholders had to raise the money to buy the shares, and also haggle with the widow over the price. In the end everyone was even more unhappy. The business did find a replacement investor-employee, but a lot of valuable time had been wasted, which could have been used in the promotion of the business, and turnover had dipped substantially. The shareholder had died intestate, which meant that because of the value of his shareholding, the widow was not entitled to it all – it had to be shared between her and the children. Also, again because there was no Will, there was no-one with authority to deal with the shares or negotiations until a Grant of Administration was secured – this caused conflict between the widow and her children on top of an already distressing situation.
Eventually there were three shareholders working in the business. As lessons had been learned, all three agreed it would be a good idea to have a Shareholders’ Agreement, and for the business to have share capital protection insurance on the lives of the shareholders. This would then enable the survivors, in the event of death, to buy a deceased shareholder’s share. In addition, the business obtained key man insurance to cover any potential dip in turnover, loss of profit, recruitment fees and expenses relating to a key person’s death in service – this would enable the business to easily meet the costs of replacing a deceased shareholder. The shareholders also had some new, comprehensive Wills drawn up, so all the problems associated with intestacy would be avoided.
When the inevitable then happened, the already difficult situation was made considerably easier on everyone – the widow received £900K without having to haggle, and the business had £150K to pay for recruiting a replacement.
Our team are here to advise on Shareholders’ Agreements, Business Wills and contracts of employment to provide you with piece of mind. If you have any questions or are looking for more detailed legal information on Wills, Shareholders’ Agreements, or any other business law matter, please contact our specialist private client, corporate and commercial solicitors in Burton on Trent on 01283 526200.