According to Families in Business, it is estimated that family businesses make up 2 out of every 3 private businesses in the UK. This is a surprisingly high figure, but perhaps just as surprising is that only approximately 16% of these family businesses currently have a shareholders’ agreement in place.
A shareholders’ agreement is a private contract between the shareholders of the company. In smaller businesses, the shareholders and the directors are often the same people. A shareholders’ agreement will govern how a company is run, setting out the shareholders’ rights and obligations. Some of the areas which are often covered in a shareholders’ agreements include: –
1. Voting rights of the shareholders and directors;
2. Matters that may require the consent of all of the shareholders holding a specific class of shares, or perhaps matters that require the consent of all of the shareholders;
3. Transfers of shares;
4. Dividend rights;
5. Dispute resolution;
6. How a shareholder can exit the company;
7. How a shareholder’s shares are to be valued;
8. Restrictive covenants.
A shareholders’ agreement is an important document for both the shareholders in a business and the business itself, particularly in family owned businesses where the number of shareholders increases as the next generation becomes involved in the business. Many disputes which arise between shareholders can be avoided if an effective shareholders’ agreement is in place which deals with issues which can otherwise cause conflict.
It is a common misconception that having a shareholders’ agreement means that there is a lack of trust between the parties. In particular, when speaking to family businesses it is common to hear the words “but we’re family”.
However, we often see how the fallout from a family breakdown can have a negative impact on the business relationships of the parties and on the business itself.
This was highlighted in a high-profile case surrounding the family-owned Indian food business Patak’s. This business was developed from a small family enterprise making curry sauces, into a multi-million pound business, but things turned sour when the head of the company died, and the shares in the business were being distributed between the siblings. In the end, a protracted case in the High Court led to two of the siblings being awarded multi-million pound settlements in 2006, but at the expense of family unity.
There is no better time to document your wishes than when things are going well and everyone is in agreement. Importantly, the potential future legal expenses of not doing so will always significantly outweigh any immediate legal costs. If you want to discuss shareholders’ agreements in any more detail then please do not hesitate to get in touch with one of our corporate solicitors on 0845 287 0939 or email us.