You may have heard about something called a shareholders' agreement and figured it's not for you. However, anyone who is setting up a company can benefit from establishing one. Whether you're in business with your partner, siblings, or children, you should think about putting one in place.
What is a shareholders' agreement?
Put simply, a shareholders' agreement is a written document that outlines the relationship between shareholders and outlines any decision-making processes and the transferring of shares. It is the official documentation that everyone agrees upon to outline the worst-case scenario and ensure that all parties are on the same page.
Although having a shareholders' agreement isn't a legal obligation, it is recommended to have one no matter how many shareholders are in a company. This will act as the formal document stating that an official discussion has been had among everyone and that everyone knows how the company will be run and provide protection if internal relations turn sour.
We all hope that when we go into business with our friends or family, it will remain good forever, but sometimes relationships do fall apart, and the company can be affected. For that reason, you need protection to ensure that everyone is safe and their shares are protected.
Do I actually need one?
You may believe that you don't need a shareholders agreement and that your business will last, but anyone who is in the process of establishing their business or has a fully-fledged company should have one in place. For example, if you own less than 50% of your company, your opinions will fall to the wayside in place of the majority. Most companies will make decisions based on the majority decision from the shareholders, with little protection from the articles of association for the minorities.
However, when you have a shareholders agreement in place, you can begin by introducing terms and clauses that outline how minority shareholders should interact and help run the business. If everyone agrees, you can find yourself included in important decisions of issuing new shares, removing or appointing new directors, or changing the main trade. You could easily be cut out from these conversations otherwise.
So, even if you've recently started a haberdashery business with your wife, you can still benefit from having a shareholders agreement and officially documenting that both of you agree to the terms. These conversations can be difficult, but having them now before a dispute arises will save you time and money.
How do you start a shareholders' agreement?
We've touched on it already, but the beginning of any shareholders agreement is discussing that you want to have one with everyone involved. No deal is going to go far or be successful if not all agree. Once you've hashed out the more challenging discussions and have a rough idea about what you want the agreement to contain, you can take this to a legal professional or representative to formalise it.
In the early development of a business, where everything costs you money, you should have this discussion as early as possible. It will save you money in the long run and an incredible amount of time.
It's common for investors to defer having and implementing this agreement while the business is being established, as it's not viewed with the same importance. This could not be more wrong, and as you are issuing those first shares for the business, you should be getting everyone together to discuss the business.
What essential things go into a shareholders' agreement?
The most significant areas to concern yourself within a shareholders agreement are:
- The power of decision making
- Rights of Vito
- The transferring of shares
- Paying dividends
- Dispute resolution procedures
- Issuing and transferring shares
There are tricky situations that can, and will, arise in a business. Many issues are caused by shareholders wanting to either sell or leave a company, especially when no discussion has happened on the process.
If a shareholder is to leave, do you want to give them the power to sell to a third party, or should they sell to another member in-house? Can they walk away with their shares despite not being an active member? Death is also a large grey area for many companies, as most people don't want to think about it. If this hasn't been discussed, the money and shares will go to an estate instead of redistributing.
If you can establish these things in the shareholders' agreement, you will find yourself having a much easier time running the business and will have peace of mind as they have been discussed. Most legal representatives will provide you with a complete list of what you need for a shareholders agreement.
Remember, you should always fill out as much as you can and not skip any steps. This will only leave a grey area that will come back to haunt you in the future.
Do shareholders' agreements and wills work together?
As mentioned, shareholders agreements can concern what happens in the event of the death of one of the party members, but most of the time, they don't. This is where wills can become a tricky path to navigate.
Ideally, a shareholders agreement and a will should work together. However, no one can control what a fellow shareholder has put into their will, and even if they could, changes can be made at any point. Just because someone has said one thing to you doesn't mean they will stick by it!
If, for example, a shareholder dies and they decide to leave their shares to their spouse, but the rest of the business has no interest in going into business with them, the shareholder agreement should have a term in place that allows them to buy those shares back into the company. Without this, the shares go straight to the estate, and more hoops have to be jumped through, so it's always wise to think about it beforehand.
If you want further tips and advice on Shareholders Agreements and Corporate Governance, listen to our podcast 'More Than Just Numbers'.
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