Many businesses have considered disaster recovery when it comes to their banking arrangements or IT systems. However, it is equally important to have provisions that can be put in place at any time to deal with major events that might occur during the life of a business such as: disputes between shareholders; the absence of key personnel for a prolonged period or the death of an owner. Hence the appeal of a shareholders’ agreement.
These events can have a catastrophic impact on a business and there is a significant risk in just relying upon business legislation to protect your company. Whilst the Companies Act 2006 incorporates generally accepted principles of company law, these principles have to apply to all types of companies, and often the needs of the owner managed limited company are not adequately provided for. For instance, there is no general right to force a shareholder to sell their shares. Company owners often wrongly assume that they can buy out dissenting shareholders or be bought out. The worst case scenario here is that the company would have to be wound up and its assets distributed to its owners. This would be wholly unsatisfactory for a successful business with value.
A preferred solution
The preferred solution for regulating the relationship between shareholders is the execution of a shareholders’ agreement. This is a private document between shareholders and can also be binding on the company if there are obligations for the company to adhere to. It can contain detailed arrangements relating to individuals, and can record the following information:
- dividend policy;
- capital contributions;
- voting rights; and
- distribution of assets to other specified people upon the death of a shareholder.
Shareholder agreements can also provide a mechanism for valuing and buying shares from somebody in the event of a deadlock situation. It can include provisions which deal with the death or illness of a shareholder. For example upon a long term or critical illness, alternate directors can be named and appointed. Insurance policies can be taken out by the company to pay for the acquisition of the shares of that shareholder. There can be automatic transfer provisions incorporated into the agreement so that if a shareholder lacks mental capacity and is unable to sign, the company or another individual can be named as being able to sign on their behalf. This ensures that the future of the company is certain and allows for potential problems to be dealt with in a timely manner.
Whilst the cost of a document which you may never use may seem unjustified, the cost of litigation or extensive protracted negotiations, far outweighs the cost of any agreement you might want to put in place. An agreement can be a simple set of terms setting out key areas of concern or can be long detailed agreements dealing with a variety of issues. What is absolutely clear is that it is far easier to agree what will happen whilst you are all working together, rather than trying to agree what will happen when you are already in disagreement.