Shareholder agreements: why your small or family business needs one

Shareholder agreements: why your small or family business needs one

When you’re at the start of a business’s life cycle, the last thing on everyone’s mind will be disputes, a change in shareholders or even the failure of the business. These are scenarios that you hope will either never apply, or will occur at a much later point in the business journey.

But it’s at the very start, at this point of business harmony, that you should consider setting up a shareholders’ agreement.

And there are a number or reasons why this is a prudent move.

What is a shareholders’ agreement?

So what is a shareholders’ agreement? And why do you need one at all?

The agreement is a legally binding document that sets out the running of the company, the responsibilities of the shareholders and the agreed processes for finding agreement and consensus on decisions affecting the company.

By putting the points in writing, the business is in a far better position to resolve any disagreements and disputes if they do arise – and we hope very much that they won’t!

Reducing the potential for conflict

It’s extremely important that the agreement is put in place when everybody is happy. Then, later down the line, you can be confident that the agreements contained in the document were agreed willingly, wholeheartedly – and by every shareholder in the company – at the very start of the company’s life.

Having the shareholders’ agreement in place helps to reduce potential conflicts and to provide clear evidence of the agreed way the company should be run. And that can be extremely important when you have a multi-shareholder situation.

In multi-shareholder scenarios you are dealing not just with multi shareholders but, potentially, with several different families or groups of interested parties.

So you need to consider each individual’s perspective, their role in the business and decide how a consensus can be reached on agreed responsibilities and processes.

Scenario plan for every eventuality

At the discussion stage, prior to the shareholders’ agreement being formalised, you should consider as many scenarios as possible. Think ahead and scenario plan for every potential outcome – and how the business would need to deal with this outcome in the future.

  • Exiting shareholder/s – What happens if one of the founding shareholders decides to leave the business? How is this dealt with?
  • Dispute (hopefully never to be used!) – How do you deal with a formal (or informal) dispute between shareholders? Who will arbitrate and who has the power to settle the dispute and make a final decision?
  • Share sales – If the business is to be sold, how will this sale be handled? Is a majority needed to agree on a sale? Do all shares have to be packaged up?
  • Cash calls – When capital is needed for growth or to buy new assets, how will shareholders be asked for additional cash to support the company?
  • Business failure – In a very worst case scenario, if the business fails, how will it be wound up and what happens to any existing capital and assets?

Talk to us about your shareholders’ agreement

As you can see, scenario planning for every potential outcome is a highly complex affair.

It requires a good understanding of the business and its shareholders, but also the benefit of long-term experience and commercial understanding of the market.

At Comerford Foley, we specialise in business advice for aspirational small and family businesses. And we’ve years of experience that we can bring to the table when advising you of the right elements to include in your agreement.

If you’d like to work work with us start today.