Running a business was never meant to be easy, not least with so many stakeholders to try and please, such as family members, partners, staff, customers, suppliers, banks, other lenders and of course, shareholders.

Taking the last group – shareholders, many business owners run into problems when individual expectations (and business friendships) have taken different courses as the business has developed and grown over the years. For instance, a majority shareholder/founder of the business may find that they have a minority shareholder no longer working within the business but who wants to sell their shares. So, unless the rules are clear, the shares could be sold to outsiders, or worse still – the competition.

Obviously, it would probably be better for the shares to be purchased by the business if possible and cancelled, or at least offered to the other shareholders before potentially falling into hands of others outside of the business. But then the next problem is: how much is a fair price for the shares? Just because the minority shareholder paid full price for the shares initially, doesn’t mean that they can expect a pro-rata value for a minority shareholding as these are normally “discounted” due to their lack of ultimate control of the business and poor marketability.

All this can lead to real potential conflict with a rogue shareholder with an over-inflated opinion about the worth of their shares or conversely, an innocent shareholder who is being treated unfairly by the company. It may be that there was originally no intention to apply a discount to a minority shareholding in the first place but without any agreement in place, who is to say?

When it comes to selling a business, it follows that the majority shareholder will want to sell unencumbered by minority shareholders who may not be in agreement and will do their best to frustrate the sale process, in effect, holding the business to ransom.

All of these problems can generally be avoided when there is a Shareholders Agreement in place. The advantages are many, including:

  • Clarity on how the business is governed: may include limits on what each Shareholder/Director can do without the authority of other members (e.g. limits on ordering, hiring staff, decisions on strategy, appointment of Directors).
  • The procedure for selling shares: how a Shareholder might sell their shares and to whom. This may give all parties some certainty that third parties can only be involved in buying shares if approved by other parties within the Shareholders Agreement.
  • How the Shares are to be valued: whether or not there is a discount to be applied to a shareholding, depending on its size and how the value is be calculated and by whom e.g. Company Accountant or Independent Valuer.
  • Protection of parties in event of Sale or Merger: e.g. by ensuring that minority shareholders agree to an offer for the whole Company and unable to hold it to ransom (“drag along rights”) or ensuring that minorities are treated fairly in a reorganisation (“tag along rights”).
  • Dealing with bad leavers: e.g. employee shareholders who leave to set up in competition may find their share price is impacted.
  • Preventing disharmony: by having everything written down in the beginning.

In summary then, having a Shareholders Agreement may mean one less problem to deal with, when trying to please those Stakeholders!

For further help and information on Shareholder Agreements, Selling a Business or Share Valuations, please complete the form below: