Disguised Risks and Long Term Savings
Every start-up business has a honeymoon period when the shareholders who are usually also the directors are enthusiastic, excited and co-operative about working together to make a successful company. At this early stage in a company’s life, the cash flow is usually the priority and few can foresee or take into consideration future problems that may arise. It is not until strains are put on the business that cracks start to form in the relationship between the shareholders, which may lead to expensive litigation.
The majority of the procedural requirements for operating a company are contained in the company’s Articles of Association. Most Companies rely on a standard set of Articles, older companies will usually be governed by Table A and more recently incorporated companies adopt the prescribed form of Articles introduced by the Companies Act 2006. Neither are tailored to the individual needs of a company or its shareholders. The generic contents of Table A will guide you if no problems arise but unfortunately it provides few, if any, solutions in the event of a shareholder dispute. This is when a shareholders’ agreement can be vital in saving you the cost of future litigation.
Do you need a shareholders agreement? If you can foresee or assume it is likely that any of the scenarios below may happen within your company, then you should consider a shareholders’ agreement:-
1. A shareholder ceases to be actively involved in the management of the company but seeks the same benefits or agreed dividend as the other shareholders.
2. A shareholder is not invited to be a director.
3. A shareholder has lent money to the company but has no personal involvement in its management and becomes dissatisfied with the directors.
4. A shareholder is left unable to influence important decisions on the future of the company including new employees, new premises, lending or an amalgamation.
5. A shareholder wishes to transfer his shares to a third party with whom the other shareholders are unlikely to get on.
6. Shareholders may have equal voting rights and disagree on matters placing them in deadlock.
7. A shareholder going bankrupt, prematurely dying or bringing the company into disrepute.
8. A shareholder’s loyalty to the company lapsing and diverting business opportunities away from the Company.
Several more scenarios can arise and the most difficult situation is when there is no mechanism in place to remove a shareholder or when the shareholders are in deadlock. These situations unfortunately arise and litigation is often inevitable. The pitfalls of litigation include its cost, time-consuming nature and its ability to distract those involved from the day to day running of the company. At worse litigation may end in the court room and if so it is possible that an order to wind up the company will be made despite it being a successful company.
A carefully drafted shareholders’ agreement will cover all of the above scenarios and more. It is a private agreement between the shareholders and will govern their conduct in certain situations and put in place mechanisms to resolve problems that may occur. Overall it provides certainty and could save both shareholders and the company a great deal of time and money in the long term.