It is almost unheard of for people to start a business with individuals they don’t trust. What is not so rare is for there to be distrust between people in established businesses.
In all walks of life, relationships evolve and business relationships are no different. As the years go by and circumstances change, differences of opinion often arise. It is therefore important to set out at the beginning of a business relationship the way in which the parties want the business – and their roles with in it – to operate. Hopefully that document, known as s shareholders agreement, will sit in a cupboard, never to be looked at again. However, it is there as a safety net in the event of unforeseen events arising or difficulties emerging in the parties’ relationships.
Imagine the situation: three friends own a company in equal shares and run it with moderate success for five years. Two of the owners decide they’d like to expand and need bank funding. The owners are all asked to give personal guarantees to the bank, putting their own assets at risk. The third owner isn’t happy and is content with the company’s current profits.
What happens? Does he just get outvoted by the other two? Can he be forced to give the personal guarantee? If he refuses, is this fair on the other two? If the relationships become strained, can he just leave – but what about his shares in the company? The other two may want to force him out for being obstructive – can they do that? If they dismiss him as a director and employee, he’d still own a third of the company – is that fair?
A shareholders agreement could provide answers to all those questions. It might set out voting requirements for key decisions, what happens in the event of a deadlock between the shareholders, how shareholders can exit the company and to whom and at what price shares can be sold. It might also discuss the ability for a shareholder to be forced out of the company in limited circumstances.
Those circumstances might include incidents of gross misconduct but the agreement should also deal with what happens when a shareholder dies. As a co-owner, do you want the shares to pass to the spouse you really don’t get on with? Does the spouse what the shares or the cash value? What happens if the deceased left the shares to the local cats’ home?! Would you rather have the opportunity to acquire the shares yourself? Again, a shareholders agreement could answer all these questions.
Shareholders agreements are not about mistrust; they’re about future-proofing. Mapping out the way the business is to be operated and how shareholders can exit when the time is right, can only be a good thing. It provides certainty for all involved and hopefully avoids difficult and potentially costly debates and disputes in the future.
For further information on Shareholders agreements please don’t hesitate to contact Farleys Solicitors experienced Company Formation and Start Up department on 0845 050 1958, or alternatively you can email us.