Corporate and business

Going into business together? Get a Shareholders’ Agreement

Let me tell you a story of two individuals (A and X) who formed a beautiful working relationship and decided to go into business together.

They incorporate the company, appoint themselves as directors and take a 50/50 shareholding each.

All goes well for the next few years, profits are growing and their client base blooms.

Then, over time, cracks begin to form in the working relationship, things aren’t working out anymore and eventually the situation becomes unbearable meaning working together is impossible.  A wants to buy X out of the company, but X refuses to sell, or cooperate.

A seeks advice from a lawyer, and is asked – is there a shareholders’ agreement? The answer is of course no. There is no agreement on the valuation of shares, and A cannot terminate X’s directorship.

After a long-drawn-out dispute, with the business’s future being put in jeopardy, A and X agree a settlement, with vast sums, going on lawyers and court fees.

If you are starting up a new business, you may think a shareholders’ agreement is just an extra expense which you don’t really need – which is understandable when you are juggling other costs for your business. However, after seeing many clients learn the hard way, and waste so much time and money in resolving deadlock disputes, we cannot stress how important it is to get things right at the beginning.

It may be that things are working well for you in the present, but you cannot predict what the future holds. Protecting your position by planning is the best way to avoid a commercial disaster.