Shareholders Agreements - What's The Point?
Setting up a Recruitment Agency with a colleague, friend, or family member can seem like a great idea. Running a business and working with someone that you get on well with sounds like the recipe for a harmonious and successful business. However, many do not consider what will happen to the company if the relationship breaks down and it is no longer possible to make important decisions.
One option is to purchase a Shareholders Agreement. This is a binding contract between the shareholders of a company in which they agree how the company should operate. Its purpose is to establish a fair relationship between the shareholders and protect their investment in the company.
Today we are looking at the top 5 reasons why your Recruitment Agency needs a Shareholders Agreement:
- Unknown Parties
The starting position in law is that shares are freely transferable and so there is always a risk that a Shareholder may decide to sell or transfer their shares to a completely unknown person or even a competitor. To protect against this, Shareholders Agreements often detail the procedure for selling and transferring shares and a clause which is commonly included is the right of pre-emption. This ensures that shares remain within the company by requiring that any shares which are to be sold are first offered to existing Shareholders before being offered to others.
- Preventing disputes
It is estimated that 62% of start-ups fail due to shareholder conflict. Whilst a Shareholders Agreement will not prevent all disputes arising, it can minimise potential for business disputes between owners by making it clear how certain decisions are made and by providing a framework and procedures for dispute resolutions. Often Shareholders Agreements between only two Shareholders will include deadlock provisions which allow, for example, one party to buy the other out in the event of a dispute.
- Unanimous Approval
It is common for owners of small businesses to hold different share percentages. The result is that the majority shareholders are often able to force issues and make decisions that are not necessarily in the minority shareholders’ interests. To avoid any abuse of power, a shareholders agreement can put everyone on equal footing by giving minority shareholders a voice on important issues. This is why Shareholders Agreements often identify specific items that require unanimous shareholder approval for example entering into loan agreements, election of directors, and cash contributions from shareholders.
- Restrictions on Shareholders leaving the business
Without a Shareholders Agreement in place, if a Shareholder wishes to leave the business, they may be able to retain their shares which would be far from desirable, particularly if they go to work at a competitor or unknown third party. Shareholders Agreement’s often give the Company and/or other shareholders the option to acquire their shares if a Shareholder leaves. Similarly, a shareholder may leave to establish another business that competes with the existing company. A Shareholders Agreement can impose a series of restrictions on each shareholder to the effect that he will not carry on any business which competes with the original business or entices away customers, employees or key suppliers.
- Flexibility
The best thing about a tailor-made shareholders agreement is that it can be crafted to fit each business’s specific needs. For example, shareholder financing provisions, non-compete clauses, mechanisms to value the business, dealing with dividends, or any other event you can foresee occurring can be catered for.
Remember, prevention is better than cure. Spending a minimal amount of time and money on a well thought out and carefully drafted Shareholders Agreement will prevent costly mediation and litigation in the future if a dispute should arise. If you are considering a Shareholders Agreement for your Agency, TBOS can help. For further information to discuss particular circumstances, our legal department is available on 0845 881 112 or by emailing emmafowler@tbos.co.uk