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Prepare for the end: the case for a shareholders' agreement

29 Apr 2019

In the words of one of my favourite fictional characters, “hope for the best, plan for the worst”*.
 
At the start of a business relationship, particularly when setting up a limited company, no one wants to think about what may go wrong in the future.  A little like getting married when no-one wants to contemplate divorce down the line, at the outset everyone is positive about what lies ahead, and keen to get going with their new business venture. Rarely do people pause to consider the negatives.  However, as a dispute resolution/litigation lawyer, I have seen many business relationships end in deadlock, disharmony and costly disputes.
 
Often, documenting your business relationship at the outset, for example, in a shareholders’ agreement, could have avoided the problems that arise. Such an agreement can set out how certain situations and difficulties could be overcome in the future. Spending money on legal advice at the time of setting up your business could therefore prove to be invaluable, even when there is little room in the budget.
 
A shareholders’ agreement can include various clauses, but in particular parties should give some specific thought to and include provisions that:
  • deal with any deadlocks
  • provide for the sale/purchase and transfers of shares
  • set out the basis that gives rise to good/bad leavers
  • set out any dividend policies
  • set out any restrictions on the parties
  • set out the matters requiring shareholder approval
  • provide protection for minority/majority shareholders
  • set out clearly any dispute resolution mechanisms
 
This is by no means an exhaustive list.
 
Resolving disputes
In the absence of a shareholders’ agreement that sets out how issues or disputes should be resolved, there may be limited ways in which a deadlock could be broken or the value in a shareholding realised.  Two alternatives to try and 'solve the issue' would be to petition the Court for the company to be wound up on just and equitable grounds, or to consider bringing an unfair prejudice claim under section 994 of the Companies Act 2006.
 
It goes without saying that winding up the company would potentially destroy any value in it, whereas an unfair prejudice petition may result in both parties having to fund costly legal proceedings from their own pockets. The company’s funds should not be used to fund legal costs in such an action. In the absence of being able to pursue either of these avenues, the parties may find themselves locked into the company, unable to realise their investment unless common sense and agreement prevails.
 
It therefore pays to “hope for the best, plan for the worst” at the outset.

*Jack Reacher in a series of novels by Lee Childs 
 

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