3 good reasons why you need a shareholders’ agreement

The only people who needn’t read any further are those who are the sole shareholder in their company - unless you might be issuing shares to someone else at some stage, in which case carry on so that you will be prepared. Everyone else should have a shareholders’ agreement in place. Read on and I’ll explain why.

1. The earlier the better.

The number one reason to put an agreement in place now, rather than waiting is that it is much easier to get an agreement in place whilst everyone is in agreement. That might sound obvious, but how often do you hear that people have gone into business together saying they all agree about how the business will be run etc., but then down the line their views diverge or circumstances change and there is a disagreement? That can be much more expensive and time consuming to resolve. What’s worse is that whilst their eye is off the ball, the business they have worked so hard to build up will suffer. This puts at risk everything they have invested and worked so hard to achieve.

2. Do you really all agree?

Even though the business partners will start off thinking they have common goals and ideas as to how to reach them , those views can diverge over time – one may wish to invest any profits and grow the business; others may be satisfied with where they are at and want to reap the rewards personally by taking out those profits. What if you all agree that you want to grow the business, but it needs more funding – will you all contribute that? If so, in what amounts? Will it be in the same proportion as your shareholdings or all equally? Will you go for outside finance? If so, will you all be willing to give a shareholding for that or will it be as a loan? If it is to be a loan, how will security be given? If you can’t all agree about a particular issue, do you have a mechanism for resolving the disagreement? If not, you might ultimately have to wind up your company.

3. What happens if one person wants to leave?

If personal circumstances change or, for example, there is an age difference, one may wish to sell his/her shares, whilst the others want to carry on. The leaver may want to keep their shares or may want to sell them for the highest possible price and may not be concerned who buys them. Those staying on might not want the leaver as a ‘sleeping partner’. They would usually want to be able to acquire the leaver’s shares at a fair price, but without prior agreement they would have no right to do so. Without an agreement, they could otherwise be faced with a new owner of those shares with whom they have no previous relationship or knowledge. That new owner may or may not have any skill in the particular business. In a private company the value may be difficult to assess. The shareholders’ agreement can set a procedure and formula, as well as giving the remaining shareholders a right of first refusal on any sale which they would not otherwise have and can include circumstances where a transfer may be required.

The bottom line is that without a shareholders’ agreement there is much more potential for disagreement between the shareholders, particularly if things start to go wrong, but not only in those cases, and it is much easier to get an agreement in place whilst everyone is in agreement –or thinks they are.

Sue Mann 
Commercial Solicitor Birmingham

0845 003 5639