Companies generally commence trading on the basis of an opportunity, idea, invention or (more commonly) based upon previous expertise in a new or established field. The business itself, properly managed, will almost certainly have great potential.
Risk can be mitigated where there is a business partner (or partners). Setting up a business solely on your own is hard. Not having someone to discuss risk, share investment and support in the management of the company can be hard work. These owner / managers may be friends, family or associates who previously worked for someone else, perhaps in the same or a similar sector.
However, each year many promising business are derailed by internal conflicts, often as a result in a deadlock in decision-making. These conflicts can arise as a result of difficult economic trading conditions but more commonly arise where parties have differing expectations of what the company was intended to provide to them personally.
Risk and requirement for shareholders agreement
To avoid these risks, when a company is starting out all parties need to understand what it is each want from this venture and how long they want it to last. For some, this may be an open-ended opportunity with no foreseeable end, for others it may be for a limited timescale where they want to make their money and then move on.
It is for this reason that it is essential that a shareholders agreement is essential, to document the agreed plan and to enable this agreed plan to be enforced in the event one or more of the parties have a change of mind.
The maxim “prevention is better than the cure” has never been more appropriate and the existence of a bespoke shareholders agreement that specifically identifies what occurs in such circumstances enables the company to continue flourishing despite any change to the management or the shareholders or their personal relationships.
Read more here about the common components of a good shareholders agreement.
Return on investment
A shareholders agreement can orchestrate the purpose of the company and its business and the reason it is set up.
- with a single purpose vehicle (or SPV) company, the company may be set up for a single project which, once complete, will lead to a winding-down of the company and ultimately its dissolution (after profits are withdrawn net of all creditors including taxes). This is quite common in the construction industry.
- alternatively, a company may be set-up to achieve a fixed turnover or profit, or for a fixed period of time.
It is really for the owner / managers to negotiate what they want. Ultimately the purpose of such an agreement is to manufacture an exit, whether that be via a winding-up of the company or via a business sale.
Disclosure of shareholders agreement
A shareholders agreement is a private agreement between shareholders and is not publicised at Companies House for the world to see.
Therefore, the shareholders agreement, being private, can reflect whatever objectives you and your co-directors / shareholders want, regardless of how this could potentially damage the business, your customer base or the company’s reputation.
For example, If a company was set up as part of a 5 year plan, this may not be something the company wishes to be disclosed to its’ clients (especially nearing the end of this period, where a business sale may be under consideration.
At Francis Wilks & Jones we deal with all forms of shareholders agreements and exit strategies for shareholders and can advise you on the most pragmatic terms that you should include in a shareholders agreement in accordance with your personal needs. Please call any member of our team for your expert consultation today. Alternatively email us with your enquiry and we will call you back at a time convenient for you.