Why Bother with a Shareholders Agreement?

The greatest threats to any small business typically reside outside of the company; competitors, a tough labour market, supply problems etc. Sometimes when the going gets tough internal threats emerge, as employees and owners clamber to manage their problems and protect their own interests. A solid shareholders agreement can often prevent disputes arising in the first place, and pre-empt internal issues from sliding down the slippery slope of litigation.

A Typical Scenario

Businesses are started on optimism. If a business owner is starting out with a few people, this pretty much means everybody is optimistic, not just about the business but about working with each other as co-founders or shareholders. This can lead to the thought that tabling a shareholders agreement at the beginning is planning for failure (like a prenup, you could say). When a shareholders agreement is regarded as a plan for failure it can be a really difficult thing to set-up at the start of the business. Leaving it until ‘later’ only makes it less likely to happen as suspicion can arise and quickly derail relationships when a shareholder tries to establish a shareholders agreement at some random time in the future.

When best to sign a shareholders agreement?

A shareholders agreement is always best to be negotiated and signed as the first starting block of doing business (i.e. at the very beginning before work starts). This sets a base-level expectation that shareholders should work with each other professionally and without personal relationships affecting what people get out of it commercially. After all, everybody knows they are really in it to make money (granted this is often amongst other things), right? Whilst signing a shareholders is not a legal requirement (like the Articles of Association is), it does provide some very important commercial building blocks for the owners, and unlike the Articles of Association it can be kept private, and can easily be changed later on with the written consent of all original signatories.

Pre-Empting Disputes

It is often argued that having an agreement in place can make having an agreement unnecessary. Likewise, not having an agreement in place can make it more likely that one is required later down the line. The logic is that a shareholders agreement does not just provide a signed agreement to show to the court when a dispute arises so that a matter can easily be decided by a judge. The true value of a shareholders agreement is that, provided the essential issues are covered, the agreement provides a reference point allowing for everybody at all times to know where they stand, what the rules are, how they should behave, and how important it is to comply with what has been agreed. In this sense, disputes are much less likely to arise if everybody already knows how they must behave and what is expected of themselves and each other.

Options for Setting up a Shareholders Agreement

There are a few common options for setting up a shareholders agreement.

1. Some people are happy to bake something together from a template they have found online that was written in 1999 for a company in Delaware. Clearly this option is never recommended as the terms are often invalid depending on the jurisdiction, the agreement is not tested nor reviewed, and it could have been written by anybody for any specific set of circumstances.
2. For those people who are cash-strapped and want to get on, it is possible to download a shareholders agreement template on our website for just £5.99. All our documents are reviewed by paying customers, many of whom have been very happy with what they have downloaded. If you choose to download a template even from a reputable vendor like ourselves, it is always recommended that the template is checked by your own qualified solicitor to ensure it covers your particular situation.
3. It is possible to buy a semi-DIY shareholders agreement, where you complete a questionnaire with some limited assistance from a qualified professional which results in a template that is ‘optimised’ for your situation and requirements. Some specialist law firms provide this service, such as The Resolver, with prices starting around £200 ex VAT.
4. Those people with a bigger budget and more time to spend on it will hire a solicitor to do a bespoke shareholders agreement. Most commercial solicitors provide this service, for example Tees Law, with prices starting around £750 ex VAT.

Whatever the option chosen, it can never be stressed enough that a shareholders agreement is fundamentally important to any business, however optimistic people are in the beginning. A shareholders agreement adds value and reduces stress on any business and its shareholders by reducing the risk of disputes and misunderstandings from even beginning to arise in the first place.