When starting out, many businesses naturally want to keep costs to a minimum. This often results in them regarding a shareholders’ agreement as something optional or something to consider at a later date.
Similarly, many new businesses automatically adopt the model articles of association issued by Companies House when incorporating a business, rather than having articles drafted that are bespoke to the business.
Whilst neither of these decisions are ‘wrong’, it is important to be aware of their potential consequences should a problem crop up further down the road.
A significant benefit of having a shareholders’ agreement, or bespoke articles of association drawn up, is that the process itself encourages discussion of key issues. In turn, it helps identify any potential areas of disagreement.
Discussing, for example, how long shareholders are intending to be involved with the company (i.e. whether they see their shareholding as a long-term investment or whether they are looking to grow the company rapidly and exit within a matter of years), what should happen if a shareholder wants to sell their shares or what should happen if something terrible happens to a shareholder, will help to identify whether the investors have different expectations.
Once these discussions have taken place, we can draft a suitably-crafted set of documents that reflect the understanding of all shareholders and provide an agreed framework for taking the company forward.
In our experience, by having these discussions and ensuring that all shareholders are on the same page, the shareholders’ agreement can indeed be put in a drawer and forgotten about. However, crucially, the shareholders have peace of mind in knowing that should an issue arise, they have already agreed how it is to be dealt with.
This is an example of where a little preparation can save a lot of time, money and stress – whilst importantly protecting both the business and their investments.
Helen Howes is a trainee solicitor at leading Gloucestershire law firm Willans LLP. She holds a Masters in employment law and currently assists the firm’s corporate and commercial team, advising organisations on corporate re-organisations, mergers and acquisitions, joint ventures and commercial contracts and GDPR.