Going into business with other people can have great advantages but it can also have dire consequences. It is a business and should be treated as such even if getting involved with family and friends. In order to protect yourself and iron out any fine details a Shareholders Agreement should be put in place. This is not an admission of not trusting your partner it is a document that gives further reassurance about what will happen in the event of certain circumstances being activated such as disputes, breakdown of relationships, dividend policy or conflicts of interest. These circumstances happen all the time so anticipating them now will save you significant time and money if they do.
It is there to protect your investment and offer guidance in instances of dispute resolution. It is not set in stone and can be updated as needed as your business grows and evolves.
What is a Shareholders Agreement?
A shareholders agreement is an agreement between the shareholders of a company. Unlike the Articles of Association which are publicly available from Companies House a Shareholders Agreement is a private document (if properly drafted). It can be between all shareholders although in some cases might be between some shareholders who own a certain class of shares for example. The purpose of the shareholders agreement is to protect the shareholders investment in the company, set out the terms of how the company is going to be governed and ensure a fair relationship between the shareholders.
There is no set format for the shareholders agreement but you should consider incuding the following:
- set out the shareholders’ rights and obligations;
- set out the parameters for when dividends will be paid;
- regulate the sale of shares in the company (issue and transfer);
- intended exit route and timescales for achieving it;
- describe how the company is going to be run;
- levels of borrowing;
- future funding requirements;
- rights to appoint Directors;
- dispute resolution;
- provide an element of protection for minority shareholders and the company; and
- define how important decisions are to be made.
Don’t delay in putting this document together. Strike while the iron is hot and everyone is on the same page. If you intend on coming back to this when you have more time don’t kid yourself. There will always be a million and one other things that need doing that take priority. Leaving this until it is needed is not an option as it will only be needed in instances of dispute by which point it is normally too late.
You may find that items included within your Shareholders Agreement actually overlap with what is included within your Articles of Association such as transfers so it is important to ensure they are consistent. If there is a conflict it might make sense to seek legal advice as to what is correct procedure and adapt accordingly.
Forcing someone with a minority shareholding to sell if you decide to.