Partner and Head of Corporate Finance at Shulmans LLP
Post date: Monday, 9th July 2012
Setting up a new venture is an incredibly exciting time and in the rush to get things up and running it’s easy to avoid thinking ‘what if?’ Here, Andrew Bradley of commercial solicitors Shulmans explains why asking certain questions now can secure your business’ long-term stability.
Under UK law you’re obliged to declare your company’s constitution by registering your articles of association at Companies House, but many experienced entrepreneurs also choose to go further and introduce a shareholders’ agreement. Why do they do this and what’s the difference?
The articles of association essentially set out the rules under which your company operates and, as a copy is kept at Companies House, they are publically available. They can be changed by a special resolution (75% or more) of the shareholders, but by law a version must always be in place. By contrast a shareholders’ agreement is confidential and may be terminated at anytime (if all shareholders agree).
The fact a shareholders’ agreement remains confidential could be very important in any number of future scenarios, including where the shareholders wish to document between each other commercially sensitive arrangements, while the ability of shareholders to change the agreement by agreement, greatly adds to its flexibility.
In addition, the scope of a shareholders’ agreements can cover various scenarios which wouldn’t necessarily be appropriate for the articles of association, some of the most typical are outlined here:
Andrew commented: "Both minority and majority shareholders can gain significantly from a shareholders’ agreement after all each party will generally only sign up if there’s something in it for them.
"A cleverly thought out shareholders’ agreement can address many of the common complaints of minority shareholders, thus ensuring their support. For example, a shareholders’ agreement could give minority shareholders the power to appoint or remove directors, outline a favourable dividend policy, or secure the right to access information which otherwise they wouldn’t necessarily have.
"Meanwhile, from the majority’s point of view a shareholders’ agreement can provide protection from an intransigent minority. A common situation might be where the majority shareholder, who owns say, 75% of the company, wants to sell to a third party but the third party will only go ahead if they can also secure the remaining 25%. Without a shareholders’ agreement the majority shareholder could well be stuck – consequently agreements often include a ‘drag along’ clause whereby the majority of shareholders can force the minority to sell as long as certain conditions are met."
As well as these technical advantages, shareholders’ agreements can also help those involved in setting up a company confront their differences early on and, according to Andrew, this is where a substantial proportion of their value lies. Andrew explained: “The process of setting up a shareholders’ agreement forces the parties to discuss the things which commonly lead to large scale boardroom bust ups – issues like succession planning, diversification or exit strategies.
"Tackling these issues before they are ‘live’ is really valuable– it allows shareholders to recognise and hopefully resolve their differences before, for example, a buyer is knocking on the boardroom door. This approach invariably saves both heartache and money in the long run - protracted disputes and damages can eat up financial resources at an alarming rate."
Provided you are on good terms with your fellow shareholders and your company structure is relatively straightforward, setting up a shareholders’ agreement should take between two and four weeks.
Andrew said: "Many companies I work with are looking for confirmation or clarification on certain areas and we’re very happy to talk it through with them. Generally, the most effective approach is to provide a ‘checklist’ of the types of measures shareholders might like to consider and the parties can then discuss the issues privately. In many cases individuals are able to reach a level of agreement and it’s after this that they need to formally instruct a solicitor.
"Of course, if the situation is more complicated - for example with a joint venture structure, or parties require more guidance to come to an agreement - we are more than happy to provide this. In essence every shareholders’ agreement is as individual as our clients."