Insights

A Shareholders’ Agreement: A Smart Business Tool

Written by Deborah Evans
08/04/2011

A number of people think that having a shareholders’ agreement for a family company can be an indication of mistrust between the parties at the outset. This is not so. Whether the agreement is between husband and wife, parents and children, or siblings, or wider family, it is a smart and successful business tool which can cover a diverse range of issues that ensure business succession, strategy, management and financing in an efficient manner, as well as managing difficult situations should these unfortunately arise.

When a family starts up a business, the participants will normally understand their mutual goals and start out working very much in tandem and harmony. As the business grows in size in complexity, having a shareholders’ agreement in place can help the business to adapt and grow whilst at the same time helping maintain a level of arms’ length business dealings between close family members.

There are many advantages to a shareholders’ agreement. One of the fundamental advantages is that this is a private document, unlike the Articles of Association of the company. Many businesses prefer the confidentiality of a shareholders’ agreement when setting out various aspects of their dealing between each other.

The agreement can also be a useful tool for setting out the strategy of the company including how financing will be raised in the future and also how a dividend policy will be applied. It can also set out as between the family members who are running the business their various responsibilities and areas of expertise.

A shareholders’ agreement is also an excellent way of regulating the conduct of the company towards members who do not have a large shareholding. The agreement can provide for certain minority protection for the small shareholders such as receiving financial information on a regular basis and other important matters such as these which cannot be accommodated in the Articles of Association.

One of the important protections that a shareholders’ agreement can give is for business succession. Certain provisions can be made that only family members or family trusts can receive shares either on issue or transfer, and membership can be controlled in this way. The agreement can also provide for certain events ensuring that shares can be brought back by the company or transferred to other members for a fair price on events such as death or disability. It is also in this event that the members may well want to regulate membership in the event of a divorce within the family or falling out and this can be provided for.

This leads on to a critical feature of a shareholders’ agreement that can provide for an organised exit of a shareholder at a prescribed fair price. If a dissatisfied party wishes to leave, negotiating such a mechanism at an early stage will save costs and recriminations once relationships have broken down and the people involved may no longer trust each other. The mechanism will provide both an exit route and a price valuation, normally by an independent expert if the company’s auditors are not the preferred choice.

This becomes even more of a critical issue in a company where there is a 50/50 shareholding. This is known as a deadlock company. If these two parties do fall out, running the company can become impossible and the company may end up failing or being wound up by the court because the two owner directors cannot agree on how the company is run. A deadlock provision in a Shareholders’ Agreement can provide a deadlock-breaking mechanism or an exit at a fair price for one of the parties.

The very fact of thinking about these issues at an early stage is actually one of the overlooked advantages of negotiating a shareholders’ agreement. These discussions often compel the family to confront the concerns and discuss the most effective way to deal with them before such difficult scenarios arise. Addressing these issues early can be a very positive step to avoid damaging and costly disputes many years later.

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Deborah Evans

I joined Gordon Dadds in 2010, having previously trained and qualified at Constant & Constant (which later merged with TLT LLP). I have a broad range of corporate and commercial expertise, specialising in small to medium-sized private companies and working for both private clients and corporate entities, UK-based and international.

Gordon Dadds