Shareholder agreements, shareholder disagreements and more
In starting our own business, at the forefront of our thinking was to offer more than traditional acciontancy services and become the "go to trusted advisors" for clients seeking practical, experienced, cost effective solutions to business problems.
Talking of starting businesses, we have yet to come across a business where than are several shareholders, who at the outset are contemplating or deliberately seeking to create problems or disputes.
Unfortunately, in reality, things change and shareholder disputes are common.
Why you need a shareholder agreement
Start ups have to prioritise and, rightly or wrongly, when faced with difficult choices about how to use often limited start up capital shareholder agreements often lose out in the choice. The cost of legal fees for shareholder agreements or bespoke articles of association often results in shareholders delaying recording and contractually regulating rights and responsibilities between them until later. Often, later means too late or no agreement is in place when a dispute later arises.
What to include in a shareholder agreement
The fact is that a shareholder agreement is a key and essential document. Not only should it protect each shareholder from being obviously prejudiced, it should also include practicalities such as who will do what on a day to day basis, if anything, bank mandates and so on, what happens if a shareholder falls ill or dies and many other essentials. A good shareholder agreement should also have a clear and sensible mechanism for resolving disputes and what happens if a dispute cannot be resolved.
The solution we offer is to provide shareholder agreement, drafted by our experienced in-house legal team, at a significant discount to the likely charges of a law firm.
We also advise and assist where disputes arise - common causes of shareholder disputes incl;ude :-
- that there is no clear agreement in place - the most common reason for a dispute!
- where the businss is managed only for the benefit of the majority shareholder(s).
- dividends - often the majority shareholder may find a way to extract money or benefits out of the comapny leaving no profit to pay dividends so that a minority shareholder loses out.
- Where a shareholder diverts business, money or clients to another business entity where he/she/they are involved, directly or indirectly. This falls into the categoty of a conflict of interest scenario.
- Control of information - by disclosing little or no information or by excluding certain shareholders some shareholders manipulate to the disadvanatage of others. It can also involve exclusion from meetings.
- deadlock where there are equal 50:50 shareholders – without a clear shareholder agreement establishing a mechanism for resolving deadlock situations, inertia may be the result which can stop the company functioning at worst and ultimately cause liquidation.
Resolving shareholder disputes
There are many ways in which shareholder disputes are ultimately resolved. The worst outcome tends to be court action and it can be difficult in any event legally to bring a claim as a shareholder except under the grounds of unfiar prejudice. In reality, court action is often too late, money may have gone and the business irretriveably damaged.
Another possible outcome is liquidation. With an otherise successful business, this is an outcome that really ought not to happen.
A better soloution tends to be some form of mediation or where one or more shareholder buys out other shareholders. In the absence of a clear mechanism for this in a shareholder agreement, difficulties inherently arise. Valuing the outgoing shareholders shares and the business generally is also a highly contentious area.
In any of the above scenarios, the fact that we can offer accountancy, legal and strategic advice and input from one source offers many advantages, not least including costs. Like all legal disputes, it is important not to underestimate the potential attritional tactics of an oponent who has more monet and resources than you.
Limited company directors often find themselves in challenging. complex or awkward situations and getting some high quality external advice can provide clarity, peace of mind and potentially also protection from later challenge or criticism.
Our financial and general business experience and background means we can offer a rounded view on difficult issues but we also offer legal advice and services. Common ways we assist companies and directors include :-
- advice and preparation of director service contracts;
- guidance on potential conflict of interest situations;
- where directors have concerns about some financial aspect of the company's activities, whether suspected fraud, poor financial performace or other;
- where directors do not agree with each other on an issue;
- where directors disagree with shareholders;
- inormation and reports for directors to provide greater clarity and forward looking information on the business financial position, such as Management Accounts or Reports.
- Advice on fiduciary duties and legal issues generally, including commercial disputes.
- Advice on potential acquisitions by the business or corporate finance related services.
Contact Chris Conway to discuss how we can help.
If you are a small business in London and need helo and advice on resolving a shareholder dispute, please get in touch with us.