Q: I would like a colleague to come on board as a director and shareholder in our business but I have invested more time and money in it to date. How can we reflect fairly our respective inputs?

Setting up a company with a friend, or having another party join you as a director, is an exciting time for a business. Sharing the workload and ideas can help to propel you forwards much more quickly than through the work of just one director. However, it’s important to protect both parties’ position to ensure that the partnership and the company can develop smoothly.

Shareholders’ Agreements

Trust in any working relationship is key but you should always ensure that, in case anything does go wrong, you both have clearly defined rights. A shareholders’ agreement is a vital document in many organisations; it can be made between any or all shareholders of a business and will protect investment, set out how the company is to run and ensure fair treatment of all investors and stakeholders.

What can it contain?

The agreement may include provisions such as:

• shareholders’ rights;
• the obligations of each shareholder and their specific roles;
• how shares are to be bought and sold;
• how dividends are to be calculated and paid;
• the voting rights of each shareholder;
• how decisions are to be made;
• how the company will be run, including appointing or removing directors, making financial decisions and making decisions as to the trade and nature of the business; and
• how disputes are to be resolved.

Agreements should cover minority shareholders (those who own less than 50%) and protect their interests insofar as is possible. This may include allowing for some voting rights for important decisions so that minority shareholders still have a say in, for example, how the business is to be run, whether new shares should be issued or whether new directors should be appointed.

As a majority shareholder, you may want to include provisions that allow you to require a minority shareholder to sell their shares. This will prevent you from being held back when making a business-critical decision at a time of your choosing.

Shareholders, especially those with a minority shareholding, should be prevented from disclosing confidential information or working with a competitor and an agreement should set out when, how and, most importantly, to whom, shares can be sold. You will likely wish to prevent shares being sold by another shareholder to a competitor and this can be incorporated within the agreement, as well as setting out how share values are to be calculated.

The company already has Articles of Association. Why do we need this as well? 

A shareholders’ agreement and the company’s Articles should reflect and be consistent with each other. The primary difference between the two is confidentiality; a shareholders’ agreement is a private contract between shareholders and only those party to it need to know the information it contains. Articles of Association are filed at Companies House and are publically available; therefore anyone can find out what is in that document. Further, Articles of Association are often drawn up using a template document which doesn’t consider closely the needs of your specific business. A shareholders’ agreement is far more tailored to suit your situation. 

Do we need to put the agreement in place now? 

You are well advised to put the agreement in place as early as you can in your working relationship. As with any legal document, if it’s put off and delayed, you may find that you need it before you have any firm terms in place. Make your shareholders’ agreement a priority so you know you’ll be protected right from the outset.

Is a shareholders’ agreement legally binding?

The agreement will form a contract between shareholders which can be relied upon and considered by a court; it’s therefore important to ensure that it is properly drafted, signed and dated to create a binding document that accurately reflects all parties’ interests.

Mark Boon, partner at MBH, deals with company commercial matters and will be happy to discuss any issues affecting your business, partnership or limited company. Contact Mark to make an appointment on 01942 206060.

About MBH

McCarthy Bennett Holland, established in Wigan since 1971, offers a personal service across a wide range of legal practice areas, including residential and commercial property, family and matrimonial, wills and probate, employment, personal injury and company commercial.

Contact Mark Boon to discuss your commercial or other legal requirements in confidence at:

www.wigansolicitors.com
Tel: 01942 206060
Address: 26 Bridgeman Terrace, Wigan WN1 1TD
Twitter: @MBHSolicitors