What’s the fastest way to buy your lawyer a new car?

Fail to have in place shareholders’ Agreements

We have our tongues in our cheeks here,  but what tends to happen is this: the two or sometimes three of you open a new company online using a sub £25 online service, get a bank account, have a loose verbal agreement from a few meetings over lunch or drinks and sit and plot how much money you will make in the new company.

12 months in and one of you finds its them doing the work and the other shareholder and director has utilised some of the company money for their own use and things kick off.

At this stage accountancy and legal advice is taken and, as the company was set up with both of you owning it 50/50 (shareholding), you are left with some tough and expensive decisions to make. Legal advice at this stage comes with more work involved so a higher price tag, nothing but the scrappy memo of articles in place from the low cost company formation service means agreements have to be hammered out. By this time of course words have been spoken, loudly, with lots of ‘ffs’ in there and there is no going back, battle lines have been drawn and agreeing stuff is a whole lot tougher. Lawyers rub their hands and imagine the smell of new leather seats in their new car, its that sort of cost if things go to court.

What’s the alternative?

It’s so simple! [bctt tweet=”Go back to the starting point and get the documents in place to save you big bills down the line, cost is hundreds rather than the thousands involved by neglecting this aspect of running your company.” username=”Lawhound”] The alternative is painful and horrible, time consuming and exhausting.

The legal explanation

It is advantageous for company shareholders to have a Shareholders’ Agreement to regulate the relationships between them. General company law provides shareholders with some rights and protection but, by having a Shareholders’ Agreement, the shareholders can include and provide for issues which specifically concern them.

Plain English

Subject to the company law framework by having a shareholders’ agreement in place you get to write up your own rules in how the company is to run

Think of it as a type of insurance for the company shareholders and the company from future disputes which eat up time and cash and really get in the way of the day to day business.

Why do we need documents in place?

The day to day running of a company is undertaken by the directors of that company, not the shareholders (yes you need a directors’service agreement for each director too). Sometimes, at least initially, because the shareholders and directors may be the same people, the roles can get a little blurred. That’s why you need both shareholders and directors service level agreements in place. Get it all down on paper so there is a map if things get sticky later and everyone knows what has to happen next.

Of course, all company directors have legal obligations, including the fact that they must deal with matters in the company’s best interests, but there are a few issues which immediately spring to mind that shareholders should consider.

The cash spend

For example, capital expenditure (such as spending large sums of money on a single item or project or taking on a large loan) or making major changes, such as changing banks, accountants etc; hiring, firing and compensating the most senior management; taking on major commitments and entering into major agreements. All these issues, will have an effect on the company and will, ultimately affect the value of shares (the shareholders’ investment).

In view of the impact that decisions like borrowing a large sum of money to buy a new piece of equipment can have on the company it makes sense for company shareholders to be able to have their say on what should and should not happen. By including these as reserved matters in the Shareholders’ Agreement, shareholders can have their vote on these issues. If they are not included as reserved matters then shareholders may find that they simply have little or no say in the way the company is run and the manner in which their investment is dealt with.

What if shareholders are unreasonable?

It is possible to include that consent should not be unreasonably withheld or delayed.

A piece of paper can help in a dispute?

Like anything else in life, shareholders will have disagreements and, if you have a number of shareholders, this may be something which can be resolved more easily by using arbitration clauses or mediation.

However, where you need all shareholders to consent, particularly for example with two equal (50% each) shareholders, this may be a huge problem and can cause a “deadlock”. A Shareholders’ Agreement allows you to build in what will happen in a deadlock situation so that you know in advance how to deal with the situation should you ever have to face it.  Of course there are various ways of dealing with a deadlock and you can sit down and consider what would be right for you as shareholders before the worst happens. You can also add in timescales so that a situation is not allowed to run on indefinitely.

The alternative

You leave things as they are on the day you set up your company and if things go wrong pay lots of money to the lawyers to sort things out. That option means your lawyer gets a windfall from you and you get a hole in your personal income as you cannot use company money to fight what is now a personal battle. There is a better way, it just means adding some time to the set up process or now, when things are all fine, to get this sorted out. We recommend this so often to clients when they ask our advice we are all driving 2nd hand cars!

Talk to Law Hound today on 01244 300413 without obligation to see how our affordable shareholder agreement service can help protect you and your business. As well as bespoke drafting we also have templates to help you.