April 5, 2011

Are your shareholders in agreement?

It is hard not to turn the television on or open a glossy magazine these days without hearing about the celebrity divorce, usually accompanied by discussions about the benefits and drawbacks of pre-nuptial agreements.  While such agreements are not legally binding in the UK, their corporate equivalent – the Shareholders Agreement – is and is well worth having.

The incorporation of a company is like marriage – intended to be a long term relationship where parties have the same goals, will act faithfully for the benefit of the business. 

A shareholders agreement can be created at any time during the life of a company and it can be reviewed as your needs and those of the company change.  It lists the rights and obligations of the shareholders in relation to the company.  Without a Shareholders Agreement the parties have to rely on the default legislation under the Companies Act 2006 which may not be what the parties intended.

If you incorporate a company with others or purchase an “off the shelf” company you may think a shareholders agreement is not important or an unnecessary luxury that can wait until the company is doing well and profits appear. However, delay often leads to neglect and the shareholders agreement gets forgotten until the moment it is needed: this is usually the point at which shareholders fall out or want to sell the company or their shares.

The benefits of entering into a shareholders agreement are only available once it has been entered into before a dispute or disagreement has arisen. After this point it is likely to be too late to negotiate the terms of such an agreement and the only option may be to resort to litigation, which can be costly and the decision uncertain. 

The value of a shareholders agreement will differ from company to company. Some want to retain control over new shareholders joining the company, others to protect investors and control the decisions they can make; some want to make sure the business remains a family business. 

As with a hostile divorce, shareholder disputes will ultimately destroy the relationship between the parties. As with a pre-nuptial agreement, problems can be avoided by setting out an agreement in advance – and, in this case, it is legally binding.

Click here for information on Holmes & Hills corporate and commercial legal services, which include advising on and drafting shareholders agreements. 

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