Have a small company?

You and a Friend are Shareholders?

Are you protected?

A small company where you are both directors and shareholders is just a partnership with limited liability and lots of paperwork. Why do all small companies need a shareholder agreement ?

As with a partnership it is essential to have a partnership agreement so with a small company you would be very wise to have a Shareholder Agreement.

Agree how things will work in challenging times when things are good – and you can discuss important issues rationally. Do not leave it until you are in crisis.

I have lost track of the number of people who have told me they and their partner agree about everything and do not need to bother with any formal agreement.

What is a Shareholder Agreement?

• It is a legally binding private agreement between two or more shareholders.
• It sets out how a business is managed and run.
• It provides for what happens if things go wrong.

Important Essentials

It provides exit strategies for a shareholder. It may be that they fall out but equally one of life’s events and they fall ill or die. It may be just that they want to emigrate or move into different work.

To deal with these issues when they arise (and they will) with no preparation can entail long and expensive negotiations and spoil relations.

What is included?

1. How directors are appointed or removed.
2. How shares are held and procedure for creating more shares.
3. A method for shares are to be valued if to be sold.
4. How to deal with shareholder disputes (avoids deadlock if shares 50:50).
5. Protection of any minority shareholders. – otherwise, can always be out voted.
6. How the company is to be managed.
7. A policy on the issue of dividends.
8. Protect business secrets if shareholder/director leaves.

If a shareholder dies, is ill or wants to leave.

You have a set procedure for what happens. The other shareholders are given notice and the opportunity to buy the shares of that shareholder.

A method of valuation for those shares is already agreed.

The existing shareholder can then buy or if they do not the procedure is that only then can they be sold to a third party.

Without a shareholder agreement the shares would pass

• To a deceased shareholder’s beneficiaries whoever they are.
• If a shareholder/director is ill, they cannot work, and the business would suffer badly.
• If the shareholder wants to leave, they could just sell to anyone whether the remaining shareholder(s) can work with them or not.

So get organised – avoid unnecessary trouble down the line.