Why you always need a Shareholders Agreement when you start a business
If you hold shares in a company, a Shareholders Agreement can save time, money and resentment in the long run. Let’s find out why.
When you start a business with other people, you will most likely be full of optimism. You’re on the path to wealth and happiness. The last thing you want to think about is what would happen if it all went wrong.
Many entrepreneurs forego the opportunity to draw up a Shareholders Agreement when they start a company. They regard it as an unnecessary cost. However, they often end up regretting this decision. A little thought and outlay now, can save you trouble and expense in the future.
In this article, we’re going to look at Shareholders Agreements; what they are and why you need one.
What is a Shareholders Agreement?
A Shareholders Agreement is a contract between shareholders in a company. It can be between some or all shareholders. While there is no legal requirement to have one, it is advisable for many reasons to draw one up when you start your company.
The purpose of a Shareholders Agreement is to document the relationship between the shareholders for the present and future, protect shareholders’ investments and provide a framework for the running of the company.
Companies can draw up a Shareholders Agreement in any way they see fit. However, most Shareholders Agreements will make provisions for:
Transferral of shares – (generally and when a shareholder dies, becomes bankrupt or leaves the company’s employment)
Shareholder input for important company decisions
Selecting, removing and compensating directors
Dividends to shareholders
How to resolve disputes between shareholders
Benefits of a Shareholders Agreement
Shareholders Agreements bring many benefits to all shareholders of a company:
If you are a minority shareholder, you can use a Shareholders Agreement to preserve your say in how the company is run
Majority shareholders can use a Shareholders Agreement to help realise the value of the company if they choose to sell it
Shareholders Agreements offer more protection to shareholders than articles of association
A Shareholders Agreement can help enforce confidentiality between shareholders Companies can use a Shareholders Agreement to ensure shares don’t fall into the hands of competitors
When raising finance, investors often like to see a Shareholders Agreement; it is a hallmark of a well-run company
Impose restrictions when a shareholder sells their shareholding (protecting the business and applying restrictions that are more enforceable than employment related restrictions)
Company divorce
The real value of a Shareholders Agreement is felt when there is a dispute between shareholders. In nearly every situation, the relationship between shareholders is wonderful when they start the company. After all, who would go into business with someone they don’t like?
However, over time, shareholders’ priorities change. Rarely do all shareholders continue to share the same priorities as they do at the start. Running a business is stressful and can cause arguments between partners. This is how relationships deteriorate.
In situations like this, a Shareholders Agreement takes on real importance, providing a mechanism for parties to resolve their disputes. A Shareholders Agreement should be enough to resolve matters without resorting to litigation, which costs time and money. Litigation invariably ends up damaging the very business the shareholders are arguing about.
The need for a Shareholders Agreement is especially apparent when parties hold shareholdings on a 50-50 basis. We often see situations where the parties cannot agree on anything. As no one has overall control, the business grinds to a halt and everything they worked hard to achieve simply deteriorates.
Find out more with Couchman Hanson
A Shareholders Agreement doesn’t just safeguard your stake in your business; it can safeguard the business itself.
If you are starting a business with other people, it’s time to talk to Couchman Hanson. We can help you draw up clearly-written a Shareholders Agreement that brings peace of mind to both sides.
At Couchman Hanson, our solicitors genuinely care about getting the best deal for you. We’re highly professional, with ‘city’ level talent and experience, but also friendly and welcoming. Everything we do fits our values of integrity, honesty and authenticity.
If you would like to find out more, call Couchman Hanson on 01428 722189.