So you’ve incorporated your company and allocated your shares to suit your business! Your business is unique and therefore it is important not to assume therefore that standard terms apply to how your business is run into the future. A shareholders’ agreement allows the “owners” of the business, known as shareholders, to set out how they expect the business to be run. This can be drafted to suit your business directly, and separate director agreements can provide clarity to those appointed as directors must act and the powers they have.
All business owners have expectation as to how their business should be run and what the business goals are. However, as the business becomes more and more successful sometimes a group of shareholders can have different expectations, some may wish to have an quick and simple exit plan to sell out and cash in at a point they feel is appropriate for them, others may see more potential and wish to continue the business following the exit of certain shareholders.
The Shareholders agreement can set out the planned terms of each scenario to ensure stability moving forward. It may be that new equity will need to be raised by way of dilution of each shareholder or issuing more shares and the terms upon which this can take place will be governed by the agreement.
It can also deal with succession for example in family businesses where one or more of the shareholders leave the company or pass away for example.
A carefully thought out share agreement can ensure stability and ease of transition in the future without the unnecessary legal battles that could otherwise occur.
One of the hardest scenarios to overcome is a deadlock between the shareholders and a disagreement spirals and threatens the very existence of the business. This happens regularly and is often the reason Directors and Shareholders relationships break down, often irretrievably. Instructing Solicitors at the time of a deep divide in the company can be both expensive and take up vital resources the business may not be able to sustain.
Often the issue arises where there are equal number of shareholders or controlling shareholders such as 2 or 4 and so on. Where there are no terms within a shareholder’s agreement to deal with this scenario there is no legal grounding for one or more of the shareholders to proceed and nothing can then be done.
Ensuring that the shareholders agreement covers these scenarios with well thought out clauses to ensure that where such disputes or misunderstandings arise they can be dealt with fairly between the group within the boundaries of the agreement.
A well drafted Shareholders agreement should set out clear procedures for dealing with disputes to allow all parties to progress and protect the business, again remember the business is it’s own legal entity and will either continue following resolution of the dispute or be wound up. It is always preferable to avoid winding up the business where possible. Such procedures can include:
Often without planning the dynamics of a business changes, for example illness, causes one person to place less importance in the business than the other. When these scenarios are dealt with in the Shareholders Agreements it makes it much easier to reach the appropriate agreements to allow the business to continue so the hard work all parties have put in does not go to waste. Often years and years of hard work can go to waste and vast sums of money is spent dealing with disputes which often then lead to insolvency of not only the company, but the shareholders to as each battle it out for what ultimately becomes a share of nothing or very little.
When we start businesses together as likeminded eager individuals or alone as an enthusiastic entrepreneur we have financial expectations for the business, whether it be to allow others in the future to become shareholders and grow the business or whether it is to make a quick buck and move on, it is important to set out procedures for doing so.
Remember a business doesn’t end just because you or other shareholders walk away. As other people join the business and it grows understanding from the outset exactly how finances are to be managed and what can and cannot form a part of business expenses of shareholders and directors is vital.
Setting out what can and can’t be done without consent of others within the business is vital to ensuring the company funds are not misappropriated or at very least mismanaged.
Misuse of company funds is often very damaging to a business, not just because of the loss of trust between the founders, shareholders, directors and other employees but also it’s very existence and liquidity and ability to trade.
A clear and well defined Shareholders agreement sets out clearly the expectations as to how the company finances are to be managed and what procedures are in place for reconciliation of bank accounts and audits.
Further where disputes arise how these disputes are to be handled and or investigated.
Where the expectations of shareholders are different or to ensure future shareholders that are not intended to be permanent owners of the business such as equity funders are able to exit the business at a time that suits the, the shareholders agreement must provide terms allowing this to occur.
Investors are interested in the quick growth of the business following their investment of liquid assets such as cash into the business. The Shareholders agreement should allow them the ability to, for example, force a buy out of his or her shares by the remaining shareholders and a valuation process for that buy out, or their exit from the company as they have reached their agreed income from their investment for example.
Other longer term shareholders may want to ensure the growth of the business and therefore want to place a cap on the drawings allowed by the shareholders in the business to provide reinvestment of profits. Without this being set out within an agreement it is often difficult for others to see this potential in the business and they want to ensure their own personal income from the business is maximised rather than looking longer term into the future.
Where a balance needs to be drawn, it is the shareholders agreement that governs the way the business is run.