How a Shareholders Agreement can avoid a Dispute

Starting a business shares some similarities with marriage in that often, partners think that everything will go perfectly well and that they will never face any issues in their relationship. For this reason, people often neglect to put in place a Shareholders Agreement. Unfortunately, disputes can arise in both romantic and professional relationships as interests diverge. Although nobody should enter into a relationship thinking that it will fail, sadly people do fall out and Shareholders Disputes have become increasingly common.

What Disputes can arise?

Disputes can arise for many reasons over time and vary from business to business. In some cases, the Shareholders simply cannot agree the best commercial strategy. In others, a Shareholder may go AWOL or there is a disproportionate amount of time, effort and resources being put into the business. In more extreme circumstances, shareholders have stolen from Companies or set up in competition with the business. Sadly, I have seen all of these arise at different points in a Company’s lifespan and they end up being complex and costly to resolve. What’s worse, is more often than not escalation could have been prevented by having in place a Shareholders Agreement.

What is a Shareholders Agreement?

A Shareholders Agreement is a private contract which regulates the relationship between shareholders. It can contain clauses such as:-

–       Duties and obligations on shareholders. These can be broad, such as an obligation to act fairly and in the best commercial interests of the business, or narrow such as agreeing not to undertake certain actions without consent.

–       Limitations on when and how you can transfer shares, including giving a right to buy shares from a shareholder in certain circumstances such as death or incapacity.

–       Restrictions on the parties to prevent competition and keep company information and trade secrets confidential.

–       A dispute resolution mechanism which details a process that is followed to resolve a dispute, and what happens if it can’t be resolved.

Ultimately, it is a bespoke agreement that can be tailored to your needs. It is strongly recommended to have a Shareholders Agreement in place whenever you have multiple shareholders. This is regardless of the strength of friendships and the nature of relationships between shareholders.

What happens if I don’t have a Shareholders Agreement?

If you don’t have a Shareholders Agreement, disputes often become protracted as there is no foundation for your relationship as shareholders. The aim of course is to avoid litigation as it will incur more costs, take time and it will ultimately cause a lot of stress to all parties.

When seeking to resolve a dispute, it is important to try to understand the other party and why you are in this current situation. You should always try to negotiate between yourselves before starting legal proceedings. If unfortunately, this does not work, mediation is an option. The mediator will attempt to control the negotiation process and facilitate the discussions between each parties with a view to them reaching a consensus on how to proceed. Whether you negotiate or mediate, the outcomes will vary for each dispute but generally they could include:

1)    One party selling or transferring their shares to the other party for a fair price

2)    Winding up the company

3)    Continuing the business but under a new agreed strategy – which in itself may involve putting in place a Shareholders Agreement!

There is no one-size fits all approach to resolving a dispute. A successful outcome is often dependant on the parties’ willingness to come to the table and negotiate or mediate. In some circumstances, litigation may be appropriate.

If you do find yourself in a shareholder or director dispute without an agreement, our Dispute Resolution team of course can be on hand to assist. However, if you are fortunate enough that you are in a place to negotiate a Shareholders Agreement, my advice would be the age-old adage, prevention rather than cure.

For advice in relation to shareholders agreements, contact the Corporate Team on 01604 828282 / 01908 660966 or email Corporate@franklins-sols.co.uk