Shareholder’s Agreements – Part 1: the need for a shareholders agreement

The most common form of company business is a small owner-managed company, comprised of the same individuals who run the business, act as directors and who are also shareholders. This may be a business that is family-run and which has been going for some time, or it may be a joint enterprise between friends.

One of the most common problems that arise in such entities is where directors fall out, are ill or where there is an unresolvable disagreement as to how the company moves forward.

The company’s Articles of Association provides rules governing how directors agree decisions about the day-to-day running of a company, by a process of majority rule where directors are in disagreement, or by reverting to shareholders where the decision is more important or where it critically affects the intended business of the company.

This process works remarkably well but it is often the case that such decision-making leaves a bitter taste with minority shareholders or directors outvoted at such meetings or, as is often the case, directors/shareholders refuse to meet to enable such decisions to be made.

This process can often be completely ineffective where there is a deadlock between shareholders – usually where there is an even number of shareholders taking different sides with the effect that no shareholder resolutions can be passed (and often the directors are the same individuals and no decisions can be made by the company, which could be a breach of the directors’ duties and make them personally liable for any losses arising to the company or third parties).

These risks can be avoided in advance by the shareholders agreeing at the outset (although such agreement can commence at any time) a contract which governs their relationship. This is quite often referred to as a Shareholders Agreement.

For more information about forming a company call Francis Wilks and Jones on : 020 7841 0390 and ask for Senior Associate Sally Bradshaw