Why bother with a Shareholders Agreement?

Clients often come to us when they are buying a shareholding in a company or taking on a new shareholder.

They are excited about the direction the company is taking and want to make sure that all the paperwork documenting the transaction is correct. They can’t wait to make their new business a success and they are 100% sure that their business partner is on the same page – so sure that they don’t want to ‘waste money’ on a shareholders’ agreement. Much like a marriage, they don’t want to have the awkward conversation as to whether they should have a pre-nup.

However, in 99% of cases, we suggest that they should. We have experienced a number of cases where once loved-up business partners are now very much at odds and things become tense and very expensive as those shareholders unwind their arrangements and prepare to go their separate ways.

Before you sign up to go into business with a partner, we recommend that you consider:

• What percentage you will take in the company and what that actually means – e.g. can you block a ‘major transaction’ such as the sale of that business?
• Whether there are some activities that, irrespective of your percentage shareholding, you want a say in. For example, should unanimous shareholder consent be required in some cases (e.g. hiring/firing staff or the company guaranteeing another entity’s debt);
• What happens when you want to leave the company? Can you sell your shares to anyone or does the remaining shareholder have veto rights? How will your shares be valued?
• What if the other shareholder wishes to leave or dies? Can their shares be transferred to family members – would you want to be in business with their family? Could you afford to buy their shareholding (or should you have life insurance covering this risk)?
• What happens in the case of a dispute? Is there a process whereby one shareholder can force the other to sell their shares or to buy that shareholder’s shares? Do you have to go to mediation?

While these can be difficult conversations to have during the ‘honeymoon period’, it is best to ensure that everyone agrees on and documents these fundamental points from the outset. Failure to do so can (and often does) result in legal (and accounting) fees many multiples of the cost of a shareholders’ agreement – not to mention the associated stress and time costs.

We all hope for a ‘happily ever after’ but you’ll sleep better knowing that you and your partners have an agreement in place that deals with these potentially tricky issues. Please get in touch if you’d like some advice.