Incorporating a simple limited company is only a few internet clicks away. For a small amount of time and expense, the owners of a business can benefit from limited liability and start operating immediately with their new company. However, although that is all that is needed to get up and running, there is a key element missing. A shareholders agreement is required to govern the relationship between the shareholders/owners and without one the business and its owners are exposed and vulnerable to problems that could bring about the end of the business.
Although a business can operate under a simple setup without issue, situations can eventually arise where it proves problematic. Whether there is a breakdown in relationships, disputes over other owners’ activities or an owner’s unfortunate death, a shareholders agreement is there to put in place rules and procedures to be followed should an issue arise.
Deadlock
Companies with two equal shareholders are particularly susceptible to the issue of deadlock. A deadlock situation can arise where there are two equal shareholders and neither can make business decisions without the consent of the other. Although rules requiring both shareholders to agree decisions are necessary, there are circumstances where such rules need to be disapplied or for alternative options to become available (for example if one shareholder is misusing company assets, breaching their director duties, etc.) to allow the other shareholder to take control of the company and prevent any misconduct from continuing.
The existence of a shareholders agreement in these circumstances can make the management of such situations quick and cost effective. For example, mechanisms can be built into the agreement enabling one shareholder to buy the shares of the other should they breach their duties. The price of any such purchase can be agreed beforehand and can even be used as a deterrent to prevent any problems. As all parties know the consequences of their actions beforehand, they are less likely to take any chances.
Death of a Joint Owner
In many cases, should a shareholder die, their share of the business will pass under their estate to their family. This can prove problematic for both the remaining shareholders and also the deceased’s family or estate.
The surviving shareholders will normally wish to continue to operate the business but will now need to be mindful of the rights and needs of these new shareholders who may be inexperienced with business generally. Ideally an amicable buy-out may be possible but the remaining shareholders may not have the funds available to do so. Similarly the deceased’s family may not wish to own half of a business and may prefer the value of the shares. This is especially so if they were financially dependent on the deceased.
A shareholders agreement can be used to ensure that insurance policies are in place which provide for funds to be available to purchase the shares and can also include mechanisms by which either party can affect the sale. This enables the remaining shareholders to continue the business but also provides a cash influx for the deceased’s family. Shareholders and their families are also provided with peace of mind knowing that there should be financial stability should the worst happen.
Summary
Most companies should have a shareholders agreement and ideally it should be one which is tailored to the particular company and its shareholders. Although the focus above has been on the defensive uses of a shareholders agreements, they can also be used as an enabler. Whether it’s a fledgling company that needs its shareholders agreement to lock in the commitment of its initial investors, a growing company which wants to provide a growth incentive to employees without sacrificing control or for an established company whose founder wants to secure a suitable exit, a shareholders agreement can and should be used to facilitate a business’s plans.
If you would like to discuss a new shareholders agreement, or if there is an issue with your current shareholders agreement, please give us a call on 0116 289 7000.