Starting a new business, or buying into an existing one, is always an exciting time. All that positivity and enthusiasm! What could possibly go wrong?
Everything new has an element of the unknown, that’s what makes it so thrilling. But with every new business venture comes an element of risk, especially where there are shareholders involved.
Prevention is better than cure
I don’t like to rain on the parade but, as legal advisor working with small businesses in Basingstoke and beyond, I have unfortunately had to step in to help resolve shareholder disputes from time to time and inevitably this has been due to a lack of a formal agreement in place between the battling shareholders.
However amicable things are in the beginning; the sad reality is that people can occasionally end up falling out. Without adequate protection in place, this could have a significant and potentially costly impact on the shareholders in dispute and for the whole business.
That’s where a shareholders’ agreement comes in. It’s a private agreement between the shareholders of a company setting out key rights and obligations, with a process for resolving disputes. Unlike the memorandum and articles of association, a shareholders’ agreement is not filed at Companies House and nobody apart from the parties involved needs to know that it exists.
Do I need a shareholders’ agreement?
A shareholders’ agreement is useful for any company with more than one shareholder, especially if they don’t all have equal power. If that’s the shape of your business, here are some things you need to consider…
- If a shareholder wants to leave the business, how are his/her shares valued? Can the other shareholders insist on buying the shares before they are offered to others? What happens to a shareholder’s shares if that shareholder dies?
- What is the dividend policy? Is there a policy for reinvesting profits into the company?
- Are shareholders able to veto the issue of new shares to prevent their shareholding from being diluted?
- How will the business deal with a dispute between shareholders?
- Can a shareholder be forced to sell his/her shares to the other shareholders? What would the valuation procedure be in that case?
- Should shareholders set measures in place to prevent a key shareholder from leaving the business to set up in competition or poaching customers/staff?
- Do shareholders want the right to appoint directors of their choosing to ensure their views are taken into account by the board?
- Will all shareholders have equal power e.g. when can minority shareholders veto decisions?
With so many factors at play, sorting out a shareholders’ agreement can feel very confusing. Let me guide you through it. Ervin Hall offers legal advice to small businesses in Basingstoke and across Hampshire. Call me on 07919 164 500 or email firstname.lastname@example.org