Best mates starting a company – what could go wrong?
By Michael Fetter
5 October 2021
Too often do we see friends or family members starting a business together. Whilst this is a great idea, pulling your resources for the benefit of the friendship, it is critical to ensure your legal documents are in good shape to avoid any possible fall outs down the track.
What is a Shareholders Agreement?
A Shareholders Agreement is a document which sets out the ongoing relationship between the new company and its shareholders. It sits alongside the company constitution, and is called upon if there is a dispute between shareholders. For many start-up businesses, the Shareholders Agreement is the most important document and is required if there are multiple shares (by multiple, we mean anything more than one!).
If your company doesn’t have one, whether it is a new company or whether you have been existing and trading for years, it is good practice to have a Shareholders Agreement put in place before the company grows.
What does a Shareholders Agreement cover?
Shareholders Agreements will cover the important issues, such as: –
- How directors are appointed;
- How directors can be removed;
- What specific issues will require a majority resolution of the board, and what decisions must be unanimous;
- What happens when the company requires capital;
- How dividends are paid;
- What happens if one shareholder wants to sell;
- Amending the rights of shareholders;
- Amending or replacing the company Constitution;
- What happens if a shareholder isn’t pulling their weight or has breached their duties to the company or other shareholders;
- Board meetings and shareholder meetings;
- Non-competition restrictions; and
- Dispute resolution processes.
These issues aren’t issues, until they’re issues.
Without a Shareholders Agreement in place, a small contradiction or disagreement could turn into a large problem very quickly, as smaller issues are often left open to dispute. Nobody anticipates a problem will occur when going into business with family or friends, however it is our job as legal advisers to advise that sometimes, things don’t always end up the way they were planned. Having a Shareholders Agreement provides piece of mind that everybody has agreed on how the company and the business is managed.
The provisions for a Shareholders Agreement can vary for every company and there is a wide range of factors to consider before the document itself is prepared.
The Shareholders Agreement will survive the life of the company, and aim to ensure that the friendship will too!
If you require a Shareholders Agreement or if you believe your previously drafted agreement is insufficient, please get in touch with any member of the Commercial Team to discuss.
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