HomeFWJ TakeawayShareholder disputesShareholder agreementsWhy do you need a shareholders agreement?

Each year many promising business are derailed by internal conflicts. 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. A good shareholders agreement can really help resolve disputes if they arise.

Owners of business can unfortunately fall out. 

Most commonly because of business direction or they think one of the other’s is getting more.  This dispute is considerably more difficult to extinguish where there are only two owner managers, whose decision-making is in deadlock.

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.

Providing for remuneration / pay

A shareholders agreement can make provision for how individual owner/managers are remunerated and rewarded for their work and their interest in the company.  It can reward a director / shareholder where their efforts drive the company’s success and growth, and it can provide for return to categories of shareholder – who may agree different rights in specific circumstances.

  • provided it does not conflict with any legal rights which all interested parties have, a shareholder agreement can amend structural aspects of the company and ensure that the company rewards investors, directors, shareholders and employees;
  • it does so in accordance with the specific requirements of those founding members in terms of their financial reward.

Common disputes

We commonly see disputes between family members, for example

  • where younger parts of the family are brought in, more family members get involved or there is a difference in functions arising from professional training or differing skills and expertise. 
  • sometimes this can lead to disagreements or differing treatments of family members whereas, as a family, they all consider themselves equal. 
  • alternatively we see many family companies break-up because some members wish to realise their whole interest in the company and/or may not agree how much their interest is worth.

Alternatively, whether it is between friends or business associates with common ideas and complementary skills, as a business grows disputes almost always arise where the business direction changes (against some parties’ wishes), or there is suspicion that a dominant or controlling character is taking more than s/he is entitled to.

Often, despite their fiduciary duties there may be a failure to deal with statutory requirements imposed on the company, there may be a falsification of records or even (as the business grows) it is not unusual for a director – unhappy at having to share the proceeds of a successful business s/he feels they have built-up – may start setting up a competing business, despite the prohibitions that exist under the Companies Act 2006.

Investment return

A shareholders agreement can run for a limited period or remain open.  It can set down the parties’ agreement to set up and run the business for a fixed period of time, with the objective of selling the business or otherwise exiting in accordance with the original owner/managers wishes.

This objective, whilst set at the start, is not always appropriate come the end of this initial period.  The shareholders agreement, properly drafted, should provide for such circumstances and should at all times remain flexible.  It may also provide for circumstances where the parties have different opinions as to whether exit is available at the end of this initial fixed period.

Disclosure of agreement

A shareholders agreement is a private agreement between shareholders and is not publicised at Companies House for the world to see.

Therefore the agreement, being private, is an agreement between you and your business partners and the world does not need to know about what your intentions are. Obviously if the shareholders agreement was publicly available then this could potentially have an effect on the company’s economic viability, the actions of its competitors or even the efficiency of the company’s employees.

However, it remains a vehicle to ensure all directors/shareholders do not veer off the track and frustrate the parties’ original intentions.

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 and how to most importantly reflect your wishes whilst achieving those of your co-shareholder. Please call any member of our team for your expert consultation now. Alternatively email us with your enquiry and we will call you back at a time convenient for you.

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