19.4.2024 | Tax

The ultimate company prenup: what’s a shareholder agreement and why do I need one?

Running a business can come with challenges but none more difficult than a breakdown in relationship between shareholders.

There are a number of reasons why disputes may arise; such as a change in the direction of the company, lack of performance by certain directors or mistreatment of duties.

So what can be done to mitigate a costly fallout?

Well, this is where a shareholder agreement comes into play.

These vital documents set out shareholders’ rights and responsibilities, and they can significantly influence safeguarding the interests of both shareholders and the company itself.

Think of it like a prenuptial agreement for your company; a private agreement between shareholders that regulates their relationship after they go into business together and will cover what would happen if, for any reason, the relationship doesn’t go to plan.

What to address

Having a shareholder agreement is not a legal requirement but sadly, relationships can change, ideas and aspirations can be upended, and we have no control over the economic climate or the fact that sometimes life just throws you an unexpected curve ball.

When tackling a shareholders agreement, know that all have certain standard elements. The key to making yours successful, however, is to put in some extra thought to get the most comprehensive arrangement in place.

Key areas to consider would be:

  • Rights and responsibilities – this includes details such as voting rights, dividend distribution, and obligations related to financial contributions or management responsibilities
  • Transfer of shares – a restriction on a shareholder transferring their shares to another party
  • Sales of shares – an agreed valuation basis, should a shareholder wish to exit the business
  • Restrictive covenants – limiting a shareholders business activity while being an existing member and post exiting. This might include clauses that help safeguard the company’s intellectual property, trade secrets, and competitive advantage.
  • Events of default – looking at what happens to shares in the event of death, divorce, bankruptcy and so on
  • Succession planning – outlining procedures for transferring shares, resolving disputes related to a transition in ownership, or specifying how a buyout must happen in the event a shareholder leaves or dies.

What about minority shareholders?

Shareholder agreements can include provisions designed to protect the rights of minority shareholders.

Generally, decisions within a company are decided by a majority vote. Therefore, if a company has a single or a small group of majority shareholders, they are able to control all decisions made.

But this may not be desirable in all scenarios.

Therefore, an agreement may include provisions that ensure minority shareholders have a say in certain key decisions, promoting fairness.

Solving conflict

This is the big one. Usually, the main reason for drawing up the document in the first place.

This is where it really pays to bring in the professionals. Yes, standard shareholder agreement templates are readily available on the internet, but as templates, they will not have all the information that is pertinent to your business. As such, they are unlikely to be fit for purpose.

And in the event of a dispute, it’s unlikely that an off-the-peg shareholder agreement will give you the tools necessary to progress to a satisfactory resolution.

The best shareholder agreements, therefore, include mechanisms for resolving conflicts, such as mediation, arbitration, or predetermined procedures for making decisions.

We would recommend involving your solicitor to assist with drawing up the legal document to ensure that it will be clear what actions should be taken and will stand up to scrutiny in the courts if required.

This structured framework can then help reduce the risk that a dispute could escalate to the point of disrupting the business.

Business as usual

Hopefully, once a shareholders agreement is entered into, it can be filed away and doesn’t need to be looked at again.

But for some, that isn’t going to be the case. And if you find yourself in a situation where things are not panning out, you’ll be glad you invested some time and money in planning ahead.

For help and advice with a SHA or any other accountancy needs, please contact Beatons info@beatons.co.uk or 01473 659777.