Friends, founders, shareholders… until something goes wrong

Holly Chadwick, Solicitor

The following is a fictional case study, but it is based on issues we regularly see arise in owner-managed businesses.

When Mr X and Mr Y started their business together, a shareholders’ agreement was the last thing on their minds. They were friends, owned 50% of the company each and shared the same vision. The business grew successfully and, for years, everything worked exactly as planned.

Then Mr Y decided he wanted to retire and suddenly, questions neither had considered became important. Could Mr Y sell his shares to anyone? Did Mr X have the right to buy them first? How would the shares be valued? What if they could not agree?

This scenario is more common than many business owners realise.

Why is a shareholders’ agreement important?

A shareholders’ agreement is designed to deal with these issues before they become disputes. It is a private agreement between shareholders which sets out how key decisions are made and what happens when circumstances change. Without one, businesses can face uncertainty when:

• a shareholder wants to leave or retire;
• shareholders disagree on the direction of the business;
• a shareholder dies or becomes incapacitated;
• a former director retains shares but no longer contributes to the company; or
• there is a dispute about dividends, funding or future growth plans.

Many businesses assume their company articles of association provide all the protection they need. In reality, articles often do not address the practical and commercial issues that arise between shareholders.

The best time to agree what happens in difficult situations is when relationships are strong, not when a dispute is already underway.

For Mr X and Mr Y, and many other business owners, a well-drafted shareholders’ agreement / articles of association could have provided clear answers from the outset. It can provide certainty, protect relationships and help ensure that the company is prepared for whatever comes next.

What should a shareholders’ agreement include?

Another important consideration is that shareholders’ agreements/ bespoke articles of association are not one-size-fits-all. They can cover matters such as how shares may be sold, how departing shareholders’ shares will be valued, what decisions require shareholder approval and how disputes will be resolved.

The best time to put a shareholders’ agreement in place is before you need one. Whether you are starting a new venture, bringing in a new investor, planning for succession or reviewing arrangements that have not been updated for years, taking advice early can help avoid costly disputes later.

At Kuits, we regularly advise founders, shareholders and owner-managed businesses on putting in place bespoke shareholders’ agreements that reflect their commercial objectives and protect the long-term future of their business. If you think it might be beneficial to put a shareholders’ agreement in place for your company, our corporate team would be happy to discuss whether your current arrangements remain fit for purpose.

Contact the team on 0161 832 3434, or at [email protected].