Do I need a shareholders’ agreement if everyone gets along?
Do I need a shareholders’ agreement if everyone gets along?
If you and your fellow shareholders get along well, a shareholders’ agreement can feel unnecessary.
You trust each other. You agree on where the agency is going. Nobody is planning to leave. Spending time agreeing what happens if things go wrong might therefore sit fairly low on the priority list.
But a shareholders’ agreement isn’t only there for when shareholders fall out.
It can set the rules for how you make important decisions, what happens if somebody wants to leave, how shares can be sold and what happens if you receive an offer for the business.
In fact, agreeing those rules while everyone gets along is usually much easier than trying to negotiate them when your interests no longer align.
A shareholders’ agreement isn’t just about disputes
It’s easy to think of a shareholders’ agreement as something designed to deal with arguments between business partners.
That’s part of its purpose, but it can do much more.
For an agency with two or more shareholders, it can establish some of the basic rules governing the relationship between you.
For example, it can deal with:
• which important decisions require shareholder approval;
• what information shareholders are entitled to receive;
• whether shareholders can transfer their shares;
• what happens if a shareholder leaves the business;
• what happens if somebody wants to buy the agency; and
• how certain disagreements will be handled.
You might agree on all of those things today. The value of documenting them is that you don’t have to rely on everyone remembering the conversation in the same way several years later.
Decide how important decisions will be made
When an agency is small, decision-making can be informal.
The founders speak regularly, make decisions together and get on with running the business.
As the agency grows, the decisions tend to get bigger too.
Should you take on significant borrowing? Bring in an investor? Issue more shares? Buy another agency? Sell an important part of the business?
A shareholders’ agreement can identify decisions that require a particular level of shareholder approval.
The right balance will depend on the business. You don’t want routine decisions becoming unnecessarily difficult, but shareholders may reasonably expect a say over decisions that could fundamentally change the company or their investment.
Agreeing where that line sits while everyone is aligned can prevent uncertainty later.
Think about what happens if one shareholder wants to leave
Nobody needs to be planning an exit for this conversation to be worthwhile.
Circumstances change.
One founder might want to retire. Someone could receive an opportunity elsewhere. A shareholder might simply decide that, after ten years of running an agency, they want to do something different.
What happens to their shares?
A shareholders’ agreement can set out a process for dealing with share transfers and, where appropriate, give the other shareholders an opportunity to buy shares before they’re offered to somebody outside the existing group.
If a shareholder also works in the business, you may want provisions dealing specifically with what happens to their shares when their employment or involvement ends. These are often called leaver provisions.
The important questions include whether they have to offer their shares for sale and how the price will be determined.
Those can become very difficult points to negotiate once somebody has already decided to leave.
A 50/50 agency needs to think about deadlock
Two founders owning 50% each is a common structure.
It can work extremely well while both founders agree. The difficulty arises when they don’t.
If a decision requires both shareholders to approve it and neither is willing to change their position, the company can reach a deadlock.
A shareholders’ agreement can establish a process for dealing with certain deadlocks rather than leaving both sides wondering what happens next.
There isn’t one mechanism that’s right for every company. The appropriate approach depends on the shareholders, their roles and the business.
The key point is to discuss the possibility when neither of you is actually in a dispute.
Trying to agree a fair process after the disagreement has already happened is considerably harder.
Agree what happens if someone wants to buy the agency
If you’re building an agency that you may eventually sell, your shareholders’ agreement and articles of association should also deal with an eventual exit.
Imagine you receive a good offer for 100% of the agency, but one minority shareholder doesn’t want to sell.
Depending on how they are drafted, drag-along provisions can allow the required majority of shareholders to require the remaining shareholders to sell their shares as part of the same transaction.
The reverse also matters.
If the majority shareholder agrees to sell their controlling stake, tag-along provisions can give minority shareholders the opportunity to sell alongside them rather than being left in the company with a new majority owner.
These provisions might feel remote when you’re focused on growing the agency, but they can become extremely important when an offer eventually arrives.
Consider what happens if somebody stops contributing
Not every shareholder in an agency will necessarily make the same contribution forever.
If two founders own the business equally and work full time, what happens if one later wants to work one day a week while keeping the same shareholding?
Or what if a shareholder stops working for the agency altogether but wants to retain all of their shares?
There isn’t necessarily a right or wrong answer.
The important thing is understanding what you’ve agreed.
If continued involvement in the business is part of the deal between the founders, it is better to address that expressly rather than relying on assumptions about what everyone will do in the future.
Your shareholders’ agreement and articles need to work together
A shareholders’ agreement isn’t the only document governing the relationship between shareholders.
The company’s articles of association contain rules about how the company operates and can deal with matters including shares, voting and decision-making.
The two documents therefore need to work together.
For example, if you’ve agreed particular rules about issuing or transferring shares, you need to make sure the relevant documents don’t pull in different directions.
This is also why downloading a generic shareholders’ agreement and changing the names isn’t particularly helpful.
The agreement should reflect how your agency actually operates, who owns it and what you’ve genuinely agreed between you.
The best time to agree the rules is usually when you don’t need them
If everyone currently gets along, that’s a good thing.
It’s also a good opportunity to have conversations that become much harder when circumstances change.
You don’t need to create a complicated agreement covering every possible scenario. The document should be proportionate to the business and the relationship between the shareholders.
But I’d want agency founders to have discussed:
• how important decisions will be made;
• what happens if a shareholder wants to leave;
• whether shares can be transferred to somebody else;
• what happens if a shareholder stops working in the business;
• how a serious deadlock will be handled; and
• what happens if somebody wants to buy the agency.
A shareholders’ agreement can’t guarantee that shareholders will never disagree.
What it can do is mean that, if circumstances change, you’re starting with rules you agreed when everyone was still sitting on the same side of the table.
Frequently asked questions
Is a shareholders’ agreement legally required?
No. A UK company isn’t generally required to have a shareholders’ agreement. However, putting one in place can allow shareholders to agree additional rules about their relationship, decision-making, share transfers and what happens if somebody leaves or the company is sold.
Can we put a shareholders’ agreement in place after we’ve started the business?
Yes. A shareholders’ agreement can be put in place after the company has been formed. In practice, it’s worth considering one when there is more than one shareholder and revisiting the arrangements when something significant changes, such as a new shareholder or investor joining.
Do we still need a shareholders’ agreement if we own 50% each?
A 50/50 ownership structure is one situation where an agreement can be particularly useful. If the shareholders disagree on an important decision, neither may have enough voting power to resolve it alone. An agreement can set out an agreed process for dealing with certain deadlocks.
This article is for general information purposes only and is not advice on your specific situation, and does not constitute legal advice.
