Fail to Plan, Plan to Fail

Monday 14 November 2016

Family, friends and other investors can often play a vital role in building a successful company, bringing money, experience and contacts to the table, often in exchange for shares in the company.

During the honeymoon period shareholders often forget, or do not recognise, the importance of formalising their relationship and how it is to be governed, hoping that because ‘she’s family’ or ‘he’s my best mate’ all business discussions and decisions will be amicable, no one ever wants to ‘rock the boat’. However, this often leads to shareholders failing to plan for certain situations that may, and more often than not, do arise in the day-to-day running of a company.

Unfortunately, these issues can quickly get out of hand, become convoluted and costly to overcome. This is where planning ahead and putting a Shareholders’ Agreement in place can prove a masterstroke in the event that ‘things go wrong’.

What is a Shareholders’ Agreement?

A Shareholders’ Agreement is a contractual agreement entered into between all or some of the shareholders of a company. It supplements the company’s Articles of Association, regulating the relationship between the shareholders, setting out principles for the management of the company, the transfer of ownership of the shares, and providing protection for the company and the shareholders which may not otherwise provided for in the company’s Articles of Association.

How can a Shareholders’ Agreement help me?    

A Shareholders’ Agreement can provide for many eventualities and effectively clarifies the rights and obligations of each shareholder in various circumstances, together with detailing any procedures to be followed.  Most importantly Shareholders’ Agreements can save time and expense for the company and the shareholders going forward by pre-empting disagreements between the shareholders and setting out appropriate ways for any disputes to be addressed.

Shareholders’ Agreements often deal with the following matters:

• Confidentiality – is the agreement to remain confidential between the shareholders? And/or does the company have confidential information to protect?

• Deadlock – what happens if the company’s business is potentially hindered because shareholders cannot reach agreement on an important decision i.e. there is a 50/50 split in voting?

• Disputes – how should a dispute between the shareholders be dealt with?

• Dividend Policies – how and when will interim and/or final dividends be declared?

• Majority Shareholder Protection – can controlling shareholders “drag along” minority shareholders to effect a sale of the company?

• Minority Shareholder Protection – can minority shareholders “tag along” on a sale by controlling shareholders?

• Management of the company – what powers do shareholders have to appoint/remove directors? And/or should certain decisions usually within the power of the board of directors be reserved for shareholder approval?

• Transfer of Shares – what happens if a shareholder wants to sell up and exit the company?

• Valuation of Shares – how will shares in the company be valued?