Why do I need a shareholder agreement?
A shareholder agreement is a contract between business owners that sets out what will happen if something unexpected happens. It is inevitable that unexpected things WILL happen in the life of your business.
The important thing is not to prevent them happening in the first place – that is impossible – but how difficult ownership issues will be dealt with by the shareholders when they do arise. You hope that problems will be resolved in a straightforward and hassle-free manner. But every business owner is different.
A shareholder agreement is like the fence at the top of the cliff. When your business strays off course the shareholder agreement protects your business from falling onto the rocks below. It ring fences the danger and keeps you out of the hands of the lawyers waiting beside the ambulance at the bottom of the cliff.
You may be suspicious of shareholder agreements. I recall a meeting with a company owner who wasn’t in the habit of mixing his words: “I’m suspicious of Shareholder Agreements. What’s the point?”
Unfortunately, simple questions do not guarantee simple answers and this one is rather difficult. Don’t let that put you off though.
On this site you will find an explanation of who needs a Shareholder Agreement, what protection it provides a company owner and what happens if you don’t have one!
The answer might not be simple, but it should be understandable.
What is a shareholder agreement?
A Shareholder Agreement is something akin to the rules of the game of being in a company with other business partners. It is not compulsory and is not a legal requirement of being in a company. It does not need to be registered at Companies House. It is a private contract between the shareholders, setting out the rules to be followed in certain situations in the life of a company.
“Do not pass go. Do not collect £200.”
As anyone who has attempted to play monopoly with their family members will know, not all games end well. Sometimes, building an empire doesn’t bring people together.
A Shareholder Agreement manages the relationship between the company owners and provides a framework for handling potentially awkward situations. It is a bit like a Living Will for a company. For example:
if one of the shareholders wants to leave the company, the Shareholder Agreement can ensure his shares are offered to the other shareholders first, before being put up for sale on the open market;
if an offer is received to buy the company, the Shareholder Agreement can ensure that all shareholders need to agree to sell their shares, otherwise the sale will not be permitted to take place;
at the end of the financial year, the Shareholder Agreement can set out how much of the profit will be reinvested in the company and how much should be distributed among the company owners.
Each of these issues could arise during the lifetime of a company. A Shareholder Agreement is a good way of settling on a course of action before things become emotive and personal, setting everyone on the same footing.
Just like a Will, you don’t have to make one by law. But unlike a Will, you will likely still be around to suffer the mess that is left if you don’t have a Shareholder Agreement when something unexpected happens between you and your business partner.
A Shareholder Agreement is the best way to make sure that things are sorted out smoothly in the future.
Who needs a shareholder agreement?
Short answer? A Shareholder Agreement can be useful for any company.
So why doesn’t every company have one? Why doesn’t a Shareholder Agreement come as standard when a new business opens a bank account? Or orders its first business cards?
Why doesn’t every person have a Will? We know that it creates more hassle, takes more time and incurs greater expense to srt out someone’s affairs if they don’t leave a Will – and yet, most individuals never get round to making a Will.
It is the same situation with Shareholder Agreements. They are important, but probably on the non-urgent list for most business owners….. until it is too late.
Perhaps, also the ins-and-outs of Shareholder Agreements are not widely understood, either by those who own shares in a company or by the business advisers that they turn to for support and advice.
The know-how of Shareholder Agreements is limited to a too narrow band of professional advisers (such as company lawyers, commercially astute accountants and business mentors) who have seen what happens when things go wrong too many times before and are the first to mention a Shareholder Agreement to their company owning clients.
Put simply, too few people who are in business understand the “point of a Shareholder Agreement”.
When to put in place a shareholder agreement?
Why do today what you can put off until next year? Rather like making a Will, creating a Shareholder Agreement is important, but it rarely seems urgent. It can be costly; you have other priorities; it’s a bit depressing (who likes to think about potential problems?) and there’s always something else demanding your time… then suddenly the undertaker is at your door.
Unfortunately, when things go badly in business and the lawyers start appearing, you can’t just slip away to a peaceful death and leave other people to pick up the pieces.
Whilst a Shareholder Agreement does not seem like a priority when you start in business, especially when funds are limited, it is a good idea to put one in place sooner rather than later, especially when a company has built up a customer base and accrued real value.
As soon as the shareholders have something valuable to lose, it becomes sensible to have a safety net in place should the relationship change for the worse. Or to borrow a phrase from the music industry: “Where there’s a hit, there’s a writ!”