Essential Business Documents – The Shareholder Agreement

Often disregarded and kicked into the long grass, a well drafted shareholder agreement could save you from a nasty company dispute. Even if you are working with family or friends (sometimes especially if you are), this document will outline the ‘rules’ so that you all know where you stand and don’t jeopardise relationships and the company.1 Advanced issues found

_{Do you really need a Shareholder Agreement?}

Picture the scene. You are discussing life with one of your closest friends and after much talk about shared interests, life experiences, and business and financial aspirations you decide to go into business together. Plans are drawn up, changes are made, and the two of you form a company together on an equal footing. Each of you become a director, and each of you take half of the shares. Equal.

Although you are experts in your business field, you decide to take some initial advice about the “business” side from your accountant or a solicitor. Both walk you through your compliance obligations, as well as some other matters which are routinely undertaken. One of their suggestions is to enter into a shareholder agreement, but you brush this off as unnecessary for the time being but you might consider it again in the future. This is one of your closest friends after all and your interests are so closely aligned it is just not worth spending money on.

So the business sets off from humble beginnings, develops a solid reputation in the marketplace, and wins some impressive contracts. Soon the two of you feel the need to expand and the business takes on staff, bank finance, premises, and assets.

The two of you are still as close as ever, remaining committed to the business, and very happy with the progress made in a short space of time.

But then something happens. It need not be significant, but just enough to test the strength of your business relationship. It could be that one of you wants to appoint a senior manager to investigate new markets against the other’s wishes. Or it could be that one of you is putting in more effort than the other. It might even be that one would like to sell out to another party or a strategic investor. Whatever the trigger, it is driving a deepening wedge between you and distracting you from the business.

So you seek legal advice and the first question put to you is “Do you have a shareholder agreement?”. After a long pause, you embarrassingly reply no.

Is this scaremongering? We don’t think so, and although the facts in any scenario are always different, we regularly see this type of difficult situation. Unfortunately, there is no simple solution. 

_{An Equal Partnership}

Whilst an equal partnership sounds like the perfect deal when working with a friend, the reality is that this can cause problems in business.

The heart of the problem is that the most common basis for company law and decision taking is that the majority rules. So when both shareholders hold an equal number of votes, or there are an equal number of directors on either side of a decision, the resolution cannot pass. The company is effectively in “deadlock”, and with the management team tied with a deadlock battle taking their eye off the business, performance often wanes and the environment can become toxic.

_{How will a Shareholder Agreement help?}

A shareholder agreement can be as simple or as comprehensive as you would like. It can deal with decision taking, director commitment, share transfers, and disputes. It can help with a deadlock. It can even address what would happen in the event of death or critical illness.

A properly drafted shareholder agreement can, and very often does, save many an argument. For those that have had to rely on the document to resolve even a minor dispute, they are worth every penny.

So, before dismissing the idea of a shareholder agreement, weigh up the initial outlay and the confidence offered in having an agreed dispute rule book against the prospect of hugely uncertain and extremely costly shareholder litigation.

_{What steps can a landlord take if a tenant makes alterations in breach of the lease?}

If alterations, sub-letting, or change of use have been carried out without the landlord’s consent then the tenant will be in breach of the lease. The question will then be if the tenant had made an application for permission whether it would have been granted?

If permission would have been granted then the alteration or sub-letting can remain, subject to the landlord’s administrative costs.

If permission would not have been granted the landlord could seek to apply for an injunction, or take steps to forfeit the lease. It is critical early legal advice is taken as the landlord can easily waive the breach which will limit his options.

If the alterations have affected the building retained by the landlord there is also the potential for the landlord to issue a claim against the tenant for trespass.

_{How do you get a Shareholder Agreement?}

The Corportate Team at Pinney Talfourd regularly advise on appropriate shareholder agreements and all aspects of shareholder issues. We can meet with you to discuss your requirements, agree a fee, and advise on the likely timescale to prepare such a document.

Alternatively, if you have already encountered a dispute and don’t have a shareholder agreement, our experienced Commercial Litigation Team will help you through what will probably be a costly, lengthy, and uncertain process.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.