If you’re going into business with other people, it’s essential that you establish arrangements for important issues and lay down some guidelines and rules on your respective responsibilities and how the company will operate.
If your startup business has two or more shareholders, you should consider setting up a formal shareholders’ agreement. Agreeing on how you will handle fundamental issues could save a lot of anguish later on.
What is a shareholders’ agreement?
A shareholders’ agreement is an arrangement between a company’s shareholders that describes how the business will be operated and outlines each shareholder’s rights and obligations. It is different from the statutory requirement to have articles of association.
The shareholders’ agreement ensures each shareholder is treated fairly. Some observers compare it to a prenup agreement agreed ahead of marriage. It will deal with how disputes are resolved and agree on exit plans for each party and what they may be entitled to.
Establishing an agreement at the outset is important
It is important that the agreement is established at the very outset. This ensures the arrangements you have with your shareholders are clearly set out to minimise the risk of dispute. You can’t always foresee the issues that will arise in the future, so it makes sense for all concerned to establish the agreement on day one.
A shareholders’ agreement ensures there is certainty and clarity about how the company is run and confirms that responsibilities are clearly outlined and understood. It will reduce the potential for conflict during the early stages of establishing the company and then later down the line. Ultimately it will ensure the business runs smoothly.
A shareholders’ agreement can mitigate the risk of minority shareholders having relatively little say in the running of the business or can intentionally protect the interests of majority shareholders. It can also establish how much power and control directors have, and when and how they should consult with shareholders.
Decision limbo or deadlock
Some disagreements will lead to a position where shareholders cannot agree on the best way forward. If there is no majority to determine which direction to take, the business can become locked in limbo. This is common when a number of shareholders hold the same percentage share and become deadlocked. A shareholders’ agreement will help avoid this scenario.
Exiting the business
At some point, one or more shareholders are likely to want to leave the business and you might think this will be easy to manage. But often, it isn’t. At this point, there are a huge number of things to consider – and without an agreement concluding what happens next, it can be very difficult.
What happens if the shares are now very expensive and the other shareholders can’t afford to buy them? What happens if the exiting shareholder wants to set up in direct competition? What happens if the exiting shareholder sells their shares to someone you don’t want involved in your company or that person inherits them as a beneficiary?
Furthermore, without a shareholders’ agreement, it can be almost impossible to remove a shareholder from the company, even with recourse to a costly court case.
Most people who go into business with each other do so for a good reason, and mostly because there exists an element of trust and some mutual goals.
But as businesses grow, views and circumstances can change, and differences arise. If there is no clarity on what happens next, this can be the end of the business.
Disputes in companies can and do destroy businesses, careers, reputations and relationships. The enormous time, energy and fees required to resolve some differences can be catastrophic. A shareholders’ agreement costs relatively little and could just save the day.
We have put together a shareholders Agreement checklist for you! – Click here to download
If you’re looking for advice on shareholders’ agreements, contact the team at Integra Solicitors today.