Before our imminent series of Blogs on our core activity – private company sales, we’re taking a quick look at other relevant small business issues.
When setting up a new company, Shareholders’ agreements are fundamental. It’s easy to assume that nothing will go wrong between you and your business partners in the future, and you’ll probably feel that as you trust one another you don’t need to have a formal agreement. Indeed you may also feel that asking for one will seem as if you don’t trust or respect your partners.
Of course, hopefully nothing will go wrong. However, the harsh reality is that even family and best friends fall out and if the worst should happen, then it is vital to have a formal agreement prepared in advance as to how the situation will be dealt with.
Although most people will never need to rely on their agreement, experience regularly shows many instances where shareholders wish they had taken the time to put such an agreement in place, as its extremely difficult to reach any kind of agreement when there is a serious dispute.
By necessity this blog can only scratch the surface of this topic, but here are some key points.
• In the absence of a shareholders’ agreement the conduct of the company and its directors is as set out in the articles of association. These by their nature follow a standard format and are a blunt instrument which may not fully cover individual circumstances as necessary for each company.
• So what is a shareholders’ agreement? As the name suggests, this is a specific document which confirms the agreement reached between a company’s shareholders as to how their company should be run.
• A proper shareholders’ agreement ensures clarity of intention, and avoids unnecessary disputes in future, for instance where circumstances may have changed or where, with the passage of time, matters agreed originally may have become blurred.
• The agreement’s fundamental purpose is to identify from the outset those key issues which may arise in the future, to record the basis for original agreement, and to set out an agreed mechanism for how they will be dealt with.
• There will be a substantial number of common issues which may require inclusion.
• One matter typically dealt with is the exit strategy of the shareholders. This will cover the full exit through a sale of the business, and also the common situation where one or more shareholders wish to leave and others wish to remain.
• Directly connected with that is the issue of valuing the business, and of determining how the company’s shares will be valued, and thus to determine the value of each shareholder’s stake, and to define the way in which these must be sold.
• Finally, the agreement will also enable all shareholders to consider what should happen in the event of their untimely death or incapacitation, for the benefit of the company.
• A good shareholders’ agreement will facilitate smooth handling of any such issues, will avoid the need for costly litigation, and will save a huge waste of management time and emotion in dealing with what can all so easily otherwise become problem issues.
Very often a shareholders’ agreement is overlooked or deemed unnecessary, but it is never too late to prepare, or indeed amend an agreement. And as with all such documents, proper specialist advice is crucial.
18 March 2019