If only...I'd adopted a shareholders' agreement

Partnerships are easy to get out of and unravel, so you can have your investment back - even if there is no agreement, you can simply give notice to terminate the partnership, at which point you can have what you are entitled to of the partnership’s assets.

Jointly-owned companies are not so easy to sort out if one share- holder wishes to leave: there is nothing implied into your relation- ship with your fellow shareholder(s) to oblige them to buy you out when you want to resign or retire, nor is there anything enabling you to buy them out if you are in dispute with them. So you might end up unable to realise your investment - stuck with an investment in a company with which you are no longer actively involved.

You need a shareholders’ agreement!
Such a contract can put in place a mechanism to set out an agreed way for you to resign and be bought out by your fellow shareholders, and vice versa.

Failing to put in place a shareholders’ agreement (or one that is suitable) can lead to huge difficulties, as was illustrated in a recent dispute on which Birkett Long was advising. In this case there were several shareholders, but they broadly split into 3 camps, with no one camp having a majority of the shares and each camp not trusting the others, following a breakdown in their relationships. This effectively deadlocked the company, as it was unable to move forward in any direction without a majority of the shareholders or the board of directors agreeing on the way forward.

To compound the difficulties in this particular case, historically one group had become sole caretakers of the company’s finances and were also sole signatories on the bank account, leaving the other 2 groups in the dark as to the company’s finances and profits, and quite exposed as regards the potential mis-management of the finances and bank account. The group refused to give up such control or to share management and financial information with their fellow directors, despite this being in clear breach of their duties as directors. The bank account effectively became frozen, as the company’s bankers were not happy with the boardroom dispute. As a result the company was in a precarious position and unable to pay suppliers or operate its bank account unless all directors co-operated.

Such a dispute can have disastrous consequences for the running of the company, as the directors tend to take their eyes off the ball when trying to resolve the dispute, leaving the company without strong management or direction. Left to drift in this manner, the company can soon end up in financial difficulties and the value of the company can rapidly disappear.

To cut a long and very difficult story short, following intense negotiations, the matter was resolved, with one group of shareholders buying out another and thus gaining a majority in the company. Following this, the running of the company became much easier and the remaining directors were able to focus on making the company profitable and on growing its business, both aspects that had been neglected while the dispute had been running.

So how could they have avoided getting into so much trouble?
Setting up the company with a better management structure and proper controls over the running of the company bank account and its finances, getting in good habits from the start and putting in place a tailored shareholders’ agreement would have made the dispute less likely and its resolution much easier. It would also have saved significantly on management time and the legal fees incurred in resolving the dispute.

So don’t leave it too late - call us now to discuss how you can have a shareholders’ agreement tailored to meet your needs.

david.cammack@birkettlong.co.uk 
01206 217311