Is a shareholder’s agreement worth the paper it’s written on?

There’s a lot to think about when you’re entering into a new business with someone; be it a family member, friend or colleague.

There are new suppliers to forge relationships with, contracts to handle, office premises to organise, policies to get in place…the list goes on!

Amongst all the excitement and pressure the idea of adding any additional paperwork to the workload can be overwhelming which means that, all too often, putting a sensible and effective shareholders’ agreement in place slips down the list of priorities.

This can have severe consequences further down the line.  Disagreements between those in business together, though never planned, are common. It is essential that you have a shareholders’ agreement in place that protects your interests and provides mechanisms for effective and economic resolution of any future conflicts in ways that avoid unnecessary disruption and damage to your underlying business.

How do you know if your shareholders’ agreement is up to scratch?

Having spent nearly thirty years in the legal profession I have seen many shareholders’ agreements and it is fair to say that not all of them are of the same standard. Regretfully, many are simply are not fit for purpose and this can have dire outcomes for those shareholders that only discover their agreement doesn’t do its job once they find themselves in the middle of a dispute.

So, what can be done about this? Well, your shareholders’ agreement should be drawn up properly and comprehensively by an experienced lawyer with the specialist expertise needed to advise on the provisions required to make it effective in practice. Your shareholders’ agreement ought to be specifically tailored to your particular business and to the relationship that you intend to have with those you are going into business with. At the very least, it should include the following key elements:

• It should protect the interests of all parties – so a good shareholders’ agreement will regulate the relationship between the shareholders, the issue, sale or transfer of shares, the setting of salaries and bonuses, how profits are to be distributed and how the business is conducted and the company is run.
• It should include appropriate rights of veto – these help to protect the position of minority shareholders ensuring that majority shareholders cannot simply freeze them out of the business or take decisions on their own that might severely affect the rights or interests of others.
• It should allow access to information – provision should be made within the agreement for access to all required accounts, records, documents and other data that might be needed in order for shareholders to make fully informed decisions.
• It should enable participation in the business – a good shareholders’ agreement will secure for shareholders appropriate rights to participate in the business even in times of dispute and will help define how important decisions are to be made in the event of a fallout.
• It should provide mechanisms for the effective resolution of future disputes – these can involve provisions requiring disputes to be referred for mediation or resolved by an arbitrator rather than by the courts which may prove considerably cheaper. Other effective resolution mechanisms might include appropriate “put/call” options or “good/bad leaver” provisions.

The truth is, without an effective agreement in place, shareholders are left vulnerable and their position and interests in the company are at risk. I would always advise establishing a shareholders’ agreement from the outset when entering into a new business with another person. But, even if you haven’t had such an agreement in place from the beginning, it is never too late. An appropriate and effective shareholders’ agreement agreement can be drawn up and entered into at any stage. But, be warned, it is very much easier to get its terms agreed before you find yourself facing disagreement or conflict. Otherwise, if you don’t have one in place, you may well be looking at expensive litigation to secure shareholder protection, avoid unfairly prejudicial conduct of your company’s affairs and secure resolution of shareholder disputes.

To ensure that your shareholders’ agreement is worth the paper it’s written on consider engaging an experienced, specialist barrister to draw one up for you. You can do so cost efficiently and without having to get solicitors involved too under the Bar Council’s Direct Public Access scheme.

Do not try and cut corners

If your shareholders’ agreement doesn’t cover everything you need it to then you will be leaving yourself open to unnecessary risks and potentially painful “commercial divorce” in the future. A comprehensive shareholder’s agreement will put your mind at rest, protect your rights and interests and allow you all to get on with business.

For more information or to discuss in further detail what provisions you may need to include in your own shareholders’ agreement, please do get in touch for an initial, no-fee conversation.