Shareholder & Partnership Agreements

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Newton Longville, Buckinghamshire, MK17 0BL

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01908 985046

Shareholder & Partnership Agreements

Limited companies & Partnerships are started each year by friends, relatives or former colleagues who have a great business idea and a desire to create a successful business.  Few, however, appreciate the potential problems they are storing up for themselves by not having a formal agreement in place to set out the ground rules for their ownership of the business, determine the powers of each shareholder/partner or provide a method for resolving disputes between the owners.

The solution is a professionally drafted shareholder or partnership agreement.

A shareholders agreement allows the members of a company to agree a range of matters relating to their involvement in the company in advance, so that they will know what will happen in certain circumstances, rather than there either being nothing to govern those circumstances or having a default position implied which might not be that which they would choose.

It is therefore a means of ensuring that the company and its affairs are run as you wish.

Some of the main issues which might be addressed in a shareholders’ agreement which include:

  1. Financing of the company – who put the capital in, what happens if you need more
  2. Management of the company – how the company runs on a day to day basis
  3. Dividend policy – how you extract profits from the company
  4. Share transfers/dispose of shares – ensuring the remaining members retain control
  5. Dealing with deadlock – if the members cannot agree
  6. Business plan – setting out the business goals & vision

 Who needs a shareholders agreement?

Members of any Limited Company with more than one shareholder benefit from having a shareholders' agreement to govern issues between them not only as members of the company – which can be included in the articles – but personal matters.

Shareholders' agreements could be categorised as covering three main situations:  

  • A quasi-partnership – which is the classic owner managed business scenario where two or more friends/relatives/colleagues set up business together via a limited company, but will often refer to themselves as business partners.
  • A joint venture between two or more existing businesses which may in turn be individuals or limited companies where the parties come together to undertake a new business in the form of a limited company.
  • An investment from an outside source e.g. venture capital or other private equity investment. The investor is likely to require extensive controls, even if not taking a majority stake, and will often have its own form of shareholders’ agreement and articles with sophisticated share structures, different classes of shares etc.

What could happen if you don’t have a shareholders’ agreement?  

Without a shareholders’ agreement there is much more potential for disagreement between the shareholders, particularly if things start to go wrong. Even though the parties will start off thinking they have common goals and ideas as to how to reach them, those views can diverge over time for example:

  • One party may wish to re-invest any profits and grow the business; others may want to reap the rewards personally & take out those profits.
  • Personal circumstances change or there can be an age difference: i.e. one party may wish to sell his/her shares, whilst the others want to carry on.
  • Any leaver may want to either keep their shares or may want to sell them to the highest bidder and may not be concerned who buys them.
  • Those remaining might not want the leaver as a ‘sleeping partner’. They will likely want to acquire the leaver’s shares at a ‘fair price’. Without a prior agreement they would have no right to do so. In a private company the ‘fair price’ may be difficult to assess.
  • If one party dies, where will that leave the surviving spouse and family

When to get a shareholders’ agreement?

Now! - It is always easier to get an agreement in place whilst everyone is in agreement.

That might sound obvious, but how often do you hear that people have gone into business together saying they don’t need to spend the time and money on drawing up an agreement because they all agree about how the business will be run etc, but then down the line their views diverge or circumstances change and there is a disagreement?

That can be much more expensive and time consuming to resolve and whilst their eye is off the ball, the business they have worked so hard to build up will suffer. This puts at risk everything they have invested.

What does a shareholder agreement cost?

Solicitors Charge upwards of £2,000 + VAT for a basic shareholder agreement.  We will draft one for £750 including VAT.

If you’re in business with a partner, family member or friend, or if you are about to embark on a joint venture or take on external investment, talk to us about a drafting a shareholders’ agreement - call us 01908 985046 or email us @ info@milsomconsulting.co.uk.

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