When friends fall out – why shareholder agreements are a must

Most businesses start out with friends and family as shareholders, who provide either extra funds or specialist skills to establish the business.

If you own all the shares, think of this as a cautionary tale of the consequences of letting friends or family buy some of them from you.

And if your wife or husband is the only other shareholder and you start to fall out, you need a different sort of advice.

So why do you need a shareholders agreement?

A shareholders agreement is a bit like a pre-nup agreement that rich celebrities enter into before they get married.  A pre-nup addresses all those little “what if” scenarios and spells out, in advance, what happens to all the parties involved if the marriage fails.

A shareholder agreement is just the same. You will only ever be able to agree the small print of the agreement in advance of splitting the shares.  Once you have started to fall out, it is very unlikely you will agree on anything because both sides will already be jockeying for position.

What sort of “what if” scenarios should a shareholders agreement cover?

  • The mechanism for valuing and selling the shares when one shareholder wants to walk away or dies.  You may not want to find yourself in business with your late fellow shareholder’s wife or son who have inherited his shares.
  • Remuneration or dividends strategy.  A minority shareholder cannot dictate policy on this.  Many people find out the hard way that their flow of dividends has ceased following an argument with the majority shareholder and there is very little they can do about it.
  • Protecting the company.  If your minority shareholder walks away, you don't want them to be able to take away your key employees or customers and set up a rival, competing company.
  • Key strategic decisions.  Appointing a new director, buying a large piece of equipment, pursuing a new business strategy – these are the sort of big issues where you want all the shareholders to agree. Not for the majority shareholder to steamroller his or her wishes through the other shareholders.

And what happens if you don’t have a shareholders agreement and there is a dispute between the shareholders?  The answer is the same as in an acrimonious divorce.  The lawyers get rich and the warring parties get poorer.  Get an agreement drawn up while you are still friends.  It is not expensive and could save you a fortune.

Your choice.