What is a Shareholder Agreement?
A Shareholder Agreement sets out the “rules of the game” when two or more people own a limited company together. It is not compulsory and perfectly legal NOT to have a Shareholder Agreement. A Shareholder Agreement does not need to be registered at Companies House. It is simply a private contract between the shareholders that sets out the rules which must be followed in the life of a company.
“Do not pass go. Do not collect £200.” As anyone who has played monopoly with their family will know, not all games end well. Sometimes, building an empire doesn’t bring people together. A Shareholder Agreement can be used to create a framework for dealing with potentially awkward situations. It is a bit like a “Business Will” for a company. For example:
1. if one of the shareholders wants to leave the company, the Shareholder Agreement can ensure his shares are offered to the other shareholders first, before being put up for sale on the open market;
2. if an offer is received to buy the company, the Shareholder Agreement can ensure that all shareholders must sell their shares if the majority of shareholders want to sell out – otherwise a minority can block a sale;
3. at the end of the financial year, the Shareholder Agreement can set out how much of the profit will be reinvested in the company and how much will be distributed among the company owners.
Each of these issues could arise during the lifetime of a company. A Shareholder Agreement is a good way for business partners to decide at the outset what should happen before things become emotive and personal later on.
Just like a Will, you don’t have to make a Shareholder Agreement by law. But unlike a Will, you will likely still be around to suffer the mess that is left if you don’t have a Shareholder Agreement when something unexpected happens between you and your business partner.
A Shareholder Agreement is the best way to make sure that things are sorted out smoothly in the future.
Why do I need a shareholder agreement? It is inevitable that unexpected things WILL happen in the life of your company. The important thing is to have a clear set of instructions on how difficult ownership issues will be dealt with by the shareholders when they do arise. A Shareholder Agreement is like the fence at the top of the cliff. When your business strays off course the Shareholder Agreement protects your business from falling onto the rocks below. It ring fences the danger and keeps you out of the hands of the lawyers waiting beside the ambulance at the bottom of the cliff.
I recall a meeting with a company owner who wasn’t in the habit of mixing his words: “I’m suspicious of Shareholder Agreements. What’s the point?” Unfortunately, simple questions do not guarantee simple answers and this one is rather difficult. Don’t let that put you off though.
Who needs a Shareholder Agreement?
A Shareholder Agreement can be useful for any company. So why doesn’t every company have one? And why doesn’t a Shareholder Agreement come as standard when a new business opens a bank account? Or orders its first business cards? It is the same reason that not every person has a Will. We all know that it creates more hassle, takes more time and incurs greater expense to sort out someone’s affairs if they don’t leave a Will – and yet, most individuals never get round to making a Will.
But there are more other jobs higher up the to-do list. A Will, like a Shareholder Agreement is probably on the ‘important’ but ‘non-urgent’ list for most business owners….. until it is too late. Perhaps, also the ins-and-outs of Shareholder Agreements are not widely understood, either by those who own shares in a company or by the business advisers that they turn to for support and advice.
The knowledge of Shareholder Agreements is limited to a narrow band of professional advisers (such as company lawyers, commercially astute accountants and business mentors) who have seen what happens when things go wrong too many times before and are the first to mention a Shareholder Agreement to their company owning clients.
Put simply, too few people who are in business understand what a Shareholder Agreement is, why it is important and who can benefit from having one.
When to get a Shareholder Agreement for your company?
Why do today what you can put off until next year? A Shareholder Agreement can be costly; you have other priorities; it’s a bit depressing (who likes to think about potential problems?) and there’s always something else demanding your time… then suddenly a business crisis is at your door. Unfortunately, when things go badly in business and the lawyers start appearing, you can’t just slip away to a peaceful death and leave other people to pick up the pieces.
Whilst a Shareholder Agreement does not seem like a priority when you start in business, especially when funds are limited, it is a good idea to put one in place sooner rather than later, especially when a company has built up real value.
As soon as the shareholders have something valuable to lose, they need a safety net in place before the relationship is able to change for the worse. Or to borrow a phrase from the music industry: “Where there’s a hit, there’s a writ!”