Could a Shareholder Agreement save your business?
Here at The Legal Director, we’ve recently come across a business where the two co-founders have fallen out -- one is now leaving, in order to set up on his own, in direct competition with his former co-director.
Under the circumstances, the company’s bank account has been frozen—it needed both co-directors as signatories—and the business has more or less stopped trading while the complications are sorted out.
In another instance, a co-director has suddenly died. Encouraged by her parents, his wife—over twenty years younger, and with a background in coaching tennis rather than in electronic engineering—is proposing to sit on the board and assume a pro-active interest in the business.
Of course, neither circumstance had ever been envisaged at the time that the two businesses were set up. But in each case, and to the obvious discomfiture of those involved, an unexpected development looks set to see shareholder value put at risk.
Yet it doesn’t have to be like that. A simple piece of paper could have prevented both situations.
To us, the analogy that best comes to mind is perhaps that of a fire extinguisher. It sits there, doing nothing, perhaps prompting people to wonder why on earth it’s there in the first place.
But in the event of a fire, it promptly comes into its own, putting out the blaze, and making people glad that they had it. In short, when there isn’t a fire, you don’t need a fire extinguisher—but when fire does break out, it’s almost certainly the only tool to hand that will do the job.
So too with shareholder agreements. For the vast majority of the time, they’re not needed, and—like a fire extinguisher—they just sit there, do nothing. And the simple fact is that many businesses—indeed, the vast majority—will never need one.
Yet when fire breaks out, in the form of significant shareholder disagreements or uncertainty, then a shareholder agreement comes into its own.
So what is a shareholder agreement?
At its most basic, you can think of a shareholder agreement as simply a set of rules, governing how the business is to be managed.
Who can make decisions about the business? Which decisions have to be unanimous, or carried out through weighted majority voting? What procedures are to apply in the case of any proposed transfer of shareholdings? Are existing shareholders to be offered the right to buy? How is the price to be calculated? What happens when a shareholder dies, or is incapacitated, or simply wants to retire?
Such questions, at their starkest, are the questions that will most trouble many businesses. But they’re also the very questions that a shareholder agreement can do a lot to assist with, should there be a dispute about the best way to address them.
Simply put, the shareholder agreement sets out the way forward, eliminating uncertainty and doubt, and providing a solid framework for constructive dialogue and action.
Protecting shareholder value
More to the point, perhaps, the shareholder agreement is more than just an understanding or an agreement—it’s an understanding that is enshrined in a legally-binding document.
So should your business have a shareholder agreement? In our view, it’s certainly a sensible precaution, just like that fire extinguisher.
Because no matter how well partners know each other, and how closely they work together at the outset of a business venture, that close cooperation can’t be guaranteed to continue.
And in such a situation, a shareholder agreement provides a set of rules to govern what happens, in a way that isn’t detrimental to the business, and which protects shareholder value.
That said, it’s important that the shareholder agreement is properly constructed in a way that is appropriate for the business in question, and appropriate for the parties involved. Which is why it’s best to be cautious about some of the ‘off the shelf’ templates that are out there.
Typically, we reckon that a properly drafted shareholder agreement involves a couple of days’ work—talking to the various parties, establishing their wishes, and enshrining these in a legally-binding document.
And in our view, it’s a very sensible investment for a business to make.
At The Legal Director, we specialise in providing preceisly this kind of clear-cut legal advice, and in business-friendly language.
To find out more, get in touch by calling Ed Simpson on 01709 641 711.
Posted Monday, December 1st, 2014 by Warren RylandTweet
Other Articles In This Category
- Is your business at risk from the Uber decision? Why your self-employed contractors could really be employees
Fuelled by companies such as ride-hailing business Uber and personal courier firm Deliveroo, the so-called ‘gig economy’ is on the rise. So much so,... read more
12th of January 2017 by Warren Ryland
- The Legal Director - Commended for Innovation
Law firm The Legal Director (TLD) has been commended in the FT Innovative European Lawyers awards, which were announced at the beginning of this month. TLD ranked... read more
28th of October 2016 by Warren Ryland
- Debt versus Equity - Financing for SMEs
The need for additional finance is often the price of success for small to medium-sized enterprises (SMEs) that are looking to grow. The question that faces the... read more
14th of October 2016 by Warren Ryland
- The deceptive complexity of the Modern Slavery Act
At the end of July, Prime Minister Theresa May launched a cabinet-level government taskforce to eradicate modern slavery in the UK. It was, she said, “one of... read more
31st of August 2016 by Warren Ryland
- How our clients will benefit from the Bar Council’s escrow account
Outside the narrow realms of consumer technology, there’s often an inevitable trade-off between cost and quality. In other words, you can have something at... read more
7th of July 2016 by Warren Ryland
- As the net starts to close, the Bribery Act prosecutions begin
As we have written before, the Bribery Act 2010 is a law with undoubted teeth. Fines are potentially unlimited, and custodial sentences can be up to ten... read more
1st of May 2016 by Warren Ryland
- New rules on shareholder identification are now in force
New rules on shareholder identification are now in force - and yet many businesses aren’t aware of them. Does your business have corporate or nominee... read more
12th of April 2016 by Warren Ryland
- First SRA-regulated law firm signs up to Bar Council’s escrow account
PRESS RELEASE: The Legal Director has become the first law firm regulated by the Solicitors Regulation Authority (SRA) to sign up to the Bar Council’s... read more
31st of March 2016 by Warren Ryland
- Trade marks: the 3 biggest mistakes to avoid
Wander around a supermarket, or browse the advertisements in newspapers and magazines, and you’ll see trade marks everywhere. And it’s likely, too, that... read more
29th of February 2016 by Warren Ryland
- Avoiding flexible working’s hidden pitfalls
You don’t have to look too far to see that traditional modes of employment are increasingly giving way to more flexible working arrangements. Returnee... read more
9th of November 2015 by Warren Ryland
- Are you paying your workers the right amount of holiday pay?
A recent ruling by an Employment Appeal Tribunal is set to cause many businesses a headache. Quite an expensive headache, at that. Simply put, it means that... read more
15th of July 2015 by Warren Ryland
- The Bribery Act 2010: are you running a risk of breaking the law?
To see the difficulties that businesses can get into through bribery - or even allegations of bribery - look no further than the reputational damage suffered... read more
11th of June 2015 by Warren Ryland
- It’s official: “Lawyers not cost-effective"
Imagine, for a moment, that when faced with a serious illness, significant numbers of people took no action. And of those who did take action, around... read more
20th of January 2015 by Warren Ryland
- The high-fee culture that’s hobbling British business
Another week, and yet another critical item in the press on the cost of obtaining corporate legal advice. And to be sure, it’s certainly a fairly open goal at... read more
11th of November 2014 by Warren Ryland
- Is crowdfunding the answer to your business's financing challenge?
As the credit crunch and ensuing recession of 2008 began to bite, lending to businesses dried up. To their shock, even long-established, profitable businesses... read more
2nd of September 2014 by Warren Ryland
- Complying with the Data Protection Act: 3 business bear-traps awaiting the unwary
Visit the website of the Information Commissioner’s Office, and there’s an interesting section entitled ‘Enforcement’. In it, the... read more
1st of September 2014 by Warren Ryland
- What might a Legal Audit reveal about your business?
When we start working with a business we assess their existing legal arrangements to determine how these can be improved and aligned with commercial objectives. We... read more
9th of July 2014 by Warren Ryland