Importance of a Shareholders' Agreement
Each year, many promising businesses are derailed by internal conflicts. These conflicts often arise as a result of difficult economic and trading conditions but more commonly arise where parties have differing expectations from the company.
The maxim ‘prevention is better than the cure’ has never been more appropriate and the existence of a bespoke Shareholders’ Agreement that specifically identifies the parties’ often conflicting expectations will be invaluable in allowing the company to flourish in a dispute free environment.
1. Disagreement as to how to move forward AKA “Deadlock”
Deadlock occurs where neither a director nor shareholder majority exists to enable a decision or company resolution to be made. Whilst most common in smaller companies with two directors with equal shareholdings, deadlock can arise whenever a simple majority (i.e. over 50%) cannot be reached.
A robust deadlock provision is invaluable in breaking a deadlock situation, whether by affording a casting vote (often rotated for fairness), the involvement of a third party or expert or even causing a decision to be referred for mediation. Without a deadlock provision, many companies either grind to a halt or are damaged by unapproved decisions.
2. The Agreement of an Exit Strategy when drafting a Shareholders Agreement
When setting up a company, parties often have differing visions as to their involvement with the company. For example, one might be looking to build up the company for a quick sale whilst the other is expecting a long career with the company. These visions are best clarified as early as possible to enable, taking this example, the inclusion of a clause forcing or entitling the short term buy-out of a shareholding. If no such agreement exists, there is potential that neither party will get what they want from the company.
3. Restricting the sale of shares to an unknown third party
It is unsurprising that the sale of a shareholding to an unknown third party often causes concern to a remaining shareholder who is suddenly in business with a total stranger. The inclusion of what are referred to as “pre-emption rights” provides the remaining shareholder with the opportunity to purchase a shareholding before they can be offered outside the company. Ancillary provisions regarding the shares’ pricing are also often included.
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4. Unequal Investment into the Company – how to get right in a Shareholder Agreement
5. Are you working harder than a fellow Director/Shareholder?
6. Differing Voting Rights in a Shareholder Agreement
7. Differing Expectations from the Company – how are these dealt with in a Shareholder Agreement?
SOONER THE BETTER
Whilst understandable that a Shareholders’ Agreement is low on the list of a new company’s priorities, the sooner an Agreement is drafted the better as a company’s success only magnifies a dispute and the value of the company over which the dispute relates. Early investment in a bespoke Shareholders’ Agreement will save substantial disruption down the line and avoid the potential for company failure as a result of a misunderstanding between the parties.
Please contact us for a free and confidential assessment of your situation. Our depth of experience at Francis Wilks & Jones means that we can provide each client with tailored bespoke advice suited to his or hers individual situation
Contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.