Shareholders Agreements

Unless you are the sole owner of the company, you will be one of two or more shareholders, and it is always a good idea to have an agreement in place to to make sure that everyone is clear on each other’s obligations and expectations. It’s a little like writing a will, you’ll be thinking about the what ifs and exit plans then agreeing how these things should be dealt with. While things are rosy at the outset of the business, this might seem like overkill, but having seen the urgent need for anything in writing to point at, we think it’s absolutely crucial. We deal with succession planning for you too.

The Company’s articles of association will set out the basics of how directors shareholders can make decisions but these are almost inevitably ‘off the shelf’ – a shareholders agreement can take this much further, and in most cases, will ‘trump’ the provisions in the articles themselves.

While every day running of a company is generally left to the directors, the shareholders as owners of the company may decide that there are certain decisions that should not be left to the directors alone, and instead require shareholder approval, particularly if there are directors who are not also shareholders. Having these decisions set out in the early stages means that there is no dispute about who can make decisions.

You will also need to think about dividends and whether you will all want to be paid the same at the same time, possibly not, and we’ll work with your accountant to set up the right structure for you.

If you’re all wearing all the hats, as directors and shareholders, you can reduce the matters shareholders need to vote on but you may still need to deal with ‘deadlock’ where there are even numbers of you on the board and as shareholders. If you have no mechanism to get out of an evenly split vote or can’t get to unanimous decision where one is needed, it can be the death knell for the company.

We also have a keen eye on the balance between majority and minority shareholders and what votes look like.

A shareholders agreement is also very useful for laying down who gets ‘first dibs’ on any shares that a shareholder may wish to sell up, and ensure that they aren’t sold to a stranger. After all, you will have decided to go into business with your business partner for a reason. It can also be included what events would trigger a shareholder to be forced to sell their shares, whether that be back to the company, or to another shareholder.

Restrictions can be included so that, if someone leaves, you can restrict their activities for a certain amount of time after their departure, to stop them going into competition with you, taking your employees with them, or poaching suppliers. It is useful to have these agreed from the outset, rather than once a relationship has broken down.

Aside from a shareholders agreement assisting the shareholders internally, having one in place can also assist the company. Having such an agreement in place shows stability for the business, which can make the company and its business look more appealing to lenders and investors.

Buying and selling businesses

Sometimes called “mergers and acquisitions”, buying and selling companies tend to come at very different points in your working life and can happen in equally different ways. Your accountant may have advised you up to the point that you need a solicitor or you may have had a conversation with a few friends and spotted an opportunity. Depending on the size of the business, you may also need to be thinking about property and staff – possibly in ways that you hadn’t even considered because you just want to get on with it.

How does it work ?

Transferring a business can happen in a couple of different ways: sale of assets or sale of shares.

Assets: whether the business is a limited company or sole trader, the sale of assets essentially strips out the stuff that the buyer requires to carry on the business. This will normally consist of stock, equipment, goodwill such as client contracts, supplier contracts, premises, staff, intellectual property such as the name and logo and so on. It can also the buyer to leave behind the problematic bits such as debts and penalties.

Shares: this allows a buyer to literally step into the shoes of the people who previously owned the company, warts and all. A buyer will normally want to acquire 100% of the company and will need to carry out enough due diligence to ensure he or she is not going to discover skeletons in the closet later on !

A few basics

Due diligence: this is the process whereby a buyer will ask a series of questions, receive information and documents and inspect these and assess the true health of the business being acquired. Just like buying a house and the pre-contract enquiries, this will run through all the potential problem areas so that the buyer is fully aware of all the issues.

Warranties: the due diligence process feeds into this because warranties are essentially promises about various elements of the business from proper record keeping to issue-free accounts, tax and employment of staff. Warranties are promises, they form an essential part of the sale contract (whether it’s an asset purchase or share purchase agreement) and if they are not accurate and true, this will be a breach of contract so it’s really important to get these right. Sellers need to think about their liability here in that a share sale will tend to be personal, the seller personally owns the shares and is making promises about the company the shares are in so a breach of warranty will be visited upon him or her personally. If a company is selling assets and there will be nothing left after, the buyer might ask the owners to personally guarantee the selling company’s obligations here. If the business is a sole trader, then the liability will be personal.

Disclosure: this is the other side of the warranty coin, where the seller is putting all the issues about each warranty sought by the buyer on a plate. This gives the seller an opportunity to qualify and water down the impact of the warranties. For example:

Insurance warranty: seller promises that all insurance premiums have been paid, there are no circumstances that could void an insurance policy and no claims have been made.
Seller’s disclosure: I did notify the insurance company that we had a customer complaint last September, but it didn’t come to anything.

If in doubt, disclose it ! Your legal adviser can help here.

At the early or development stages of a business, you might be looking to take on investment and this is likely to involve either a loan to the company or the passing of shares to those investors. Both require careful thought, with entrepreneurs often believing that shifting a few of their own shares being a safe option. I would say that this requires careful planning if not to end in tears in a few years, in the absence of different sorts of shares, proper planning and written agreements, investors can begin to feel like millstones fairly quickly, particularly those who want to exert control. On the other hand, canny investors who are being relied upon for their expertise can be recompensed and worked with to enable rapid growth. Again, though, get it in writing !

We also help business owners think about succession planning which allows for the business to think about the owners’ retirement, passing the business on to the next generation or whatever the current owners want to achieve ‘at the other end’. It’s vital for business owners to consider what might happen in a worst case scenario, so that their private plans form a seamless solution with their business objectives and provide their families without conflict: for example, shares need to go in the right direction and not be caught up on absent or badly drafted shareholders agreements, wills or intestacy.

Some owners may want to pass the business on to their management team, often bit by bit. This is known as a management buy out or “MBO” and proper planning allows the expertise and loyalty of the management team to be rewarded while protecting the hard work put in by the founders.

Whatever you’re looking to achieve, we will work closely with you and your accountant to ensure that all the angles have been looked at and you’re free to focus on what’s important.

Franchises

One way of growing a business is to put it in a box for other people to make it their own, and for a franchisee it’s an oven ready business to get on with.  To grant a franchise and allow someone else to come and operate the way you do takes a great deal of preparation but if you front load the work and get it right, you will have a winning formula on your hands !

As a potential franchisor, you will need to create your manual or ‘bible’ which sets out the precise methodology you want all your franchisees to follow and a franchise agreement that details what intellectual property and other items your franchisees will be paying you for together with their obligations around protecting your business, paying you, any performance requirements and so on.  This is a lot of hard work but the idea here is that you get to watch your franchisees grow your business for you.

As a potential franchisee, you will need to pay a great deal of attention to the franchise agreement to ensure that you can not only fund ‘getting in’ but that you can operate in accordance with it and flourish.  Franchise agreements tend to be lengthy and can be pretty onerous, because you are being trusted with someone else’s baby. You also need to think about the right fit for your personality: a franchise is somewhere in between being employed and stepping out into the wide world creating your own business from scratch – you are not free to run things how you want but, on the other hand, you will have a great deal of support. That you’re paying for.

With the right fit, a franchise works fantastically well for everyone but we would always suggest a fully advised service for both parties because there are just too many potential pitfalls.

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