Do you need a Shareholders Agreement?

shareholders agreement

Going into business with someone can be a little like going into a marriage – it’s fine if it’s all going well, but if problems develop the “divorce” can be terribly acrimonious and terribly expensive!

If you are a shareholder in a private limited company, there are some very good reasons for having a Shareholders Agreement in place to set out the arrangements amongst the shareholders that aren’t otherwise dealt with in the Companies Acts. For instance, you may wish to make provision for a mechanism to manage the purchase of shares of a shareholder who wishes to leave the company or, worse still, to deal with a situation where a shareholder has died and you need to deal with her or her family members at what can be a very stressful and emotional time. If you do not have a Shareholders Agreement in place, there might be some difficulty in dealing with issues such as the valuation of the deceased or departing shareholder’s shares and the mechanism and timing of payment.

You may also find that it had been your preference, at the outset, to put up most of the money when the company started up resulting in your holding a majority of the shares with others who had a much smaller shareholding actually running the company. If, over time, you don’t like the way the company is being run, you have to rely on the Companies Acts to remove any Directors appointed by the minority shareholders and replace them with your own choices. Whilst this might be an effective way of replacing the Directors, you still have the minority shareholders who will, by now, undoubtedly be unhappy that they have been replaced. They don’t have to sell their shares to you and whilst they might not be in day to day control of the management of the company, they can certainly cause trouble and make life very unpleasant – and you don’t have a mechanism (other than to petition to have the company wound up) to buy them out for a properly assessed value. This means that they might try to hold you to ransom!

Let’s say you receive an offer to buy your shares, but that is conditional on the others in the company selling their shares to the buyer as well. If they don’t want to sell, then you might find that the buyer will not proceed with the purchase and your investment in the shares of the company is “locked in”.

On the other hand, you might be very happy working with your co-shareholder and/or Directors and your company might be very successful, but come unstuck when your co-shareholder wants to retire and sell his shares to realise his investment. You could find yourself with another person as your co-shareholder and potentially a co-director in the company or be left fighting with your one-time friend and co-shareholder about the buy-out value of his shareholding.

These are just some of the possible causes of dispute between shareholders in private limited companies and to avoid many of the pitfalls, it makes perfect sense to put a Shareholders Agreement into place to regulate the position of all shareholders in a fair and equitable way in the event of a dispute or death or disposal.

If you would like to discuss a Shareholder Agreement or any other issues relating to the operation of your Company, please call us on 0141 887 5721 or click here to email us.