'What is a shareholders' agreement?' I hear you cry. Well, it's an agreement between the shareholders of a company (perhaps unsurprisingly) intended to regulate their relationship and certain related matters such as the nature of the company's business, transferability of shares, the mechanism for commercial decision-making, the composition of the board of directors, dispute resolution, clarifying each shareholder's contribution to the company and possibly addressing things such as a dividend policy. They’re very flexible and can address pretty much anything that the shareholders want to cover.
So when do I not need a shareholders' agreement? Only if you own 100% of the shares in your company. Full stop.
If you have two or more shareholders it's always worth considering an agreement even if it's very basic and simply allows a majority shareholder to force the minority to sell to a third party if a great offer comes in from a potential buyer. The chances are that you don’t need something the thickness of War and Peace, but my two long-observed Rules of Shareholders' Agreements are that:
1. I've never seen a company with two or more shareholders that wouldn't benefit from having some level of agreement; and
2. I've never seen a shareholders' dispute resolved for less than the cost of putting in place a shareholders' agreement that could have avoided the dispute in the first place.
You may well take the view that it's in my cynical interests to drum up business for myself drafting shareholders' agreements. However, believe me, it's not in my interests because I actually end up charging more to resolve the disputes that arise when there's no agreement (see Rule 2 above). However, it's in your interests because it'll save you money in the long run. You may be one of life's eternal optimists who just assumes that when you go into business with friends or family you'll never fall out and don’t need a shareholders' agreement because you'll always agree on everything. You may well be right, but in the same way that a good proportion of marriages end in divorce, so do a good proportion of businesses that are started using a company with multiple shareholders. People change over time and so do their motivations, their ability to contribute to the business, their views on life, their views on business etc. There's no reason why a shareholders' agreement can't be flexible enough to accommodate a certain degree of deviation from the initial intentions of the shareholders, but if they simply end up disagreeing on everything (which is what happens in a full-blown shareholders' dispute), a properly-drafted agreement can provide the cleanest means of bringing things to a head.
Also, the very act of sitting down with your lawyer to discuss what you want in your shareholders' agreement can sometimes help to highlight the fact that there isn't actually agreement on what you want the business to do. That in itself is a sign that perhaps you shouldn't be going in to business together. After all, if you can't agree on day one what you want to do, it's unlikely to become clearer once the stresses of strains of running a business take effect.
Whatever business you plan to carry on, and whether there are two shareholders or twenty, please give me a call and I can point you in the right direction. I can also advise on the equivalent agreement if you plan to set up as an LLP or a good, old-fashioned unincorporated partnership. The same principles apply as with a company.
My phone number is 0131 247 1260, you can email me on firstname.lastname@example.org and I look forward to hearing from you for a free, no obligation chat.