Part 1 - "WHY" should you have a Shareholders' Agreement?

Last week I announced that I'm running a series on shareholders agreements. As a litigator practising in this space, my favourite saying is: "prevention is better than a cure". Each week for the next month, I'll be sharing some observations, tidbits and commentary, with a view to providing some thought bubbles for accountants, business advisors and business owners - please reach out if anything piques your interest.

So here we go. Part 1. The "why". WHY does a back-end litigator suggest you get your house in order with a shareholders agreement? Why would you go to the time, cost and effort of getting this done? (And the squirrels? Well. They're just there to show you how they're keeping things on track...get it?)

Shareholder disputes. They can disrupt a company's operations, whether they go into full-blown litigation, or simply create uncomfortable underlying tension. It's often triggered by changes in ownership, conflicts of interest or differences in strategic direction. Often, but not always, there’s one shareholder with the lion’s share of the interests in the company, and one or more with a minority holding. This gives rise to an inherent tension even before things can go south; what can go wrong and how can that dynamic be managed? How can you minimise that risk?

Identifying potential areas of contention early on in a business relationship is essential. A well-drafted shareholders agreement anticipates and addresses disputes, aiming for safeguarding stability and minimising disruptions. Disagreements over matters such as profit distribution, strategic direction, management issues, changes in ownership and oppressive conduct are common triggers. Turning your mind to this early not only allows you to address it in documentation, but also to have open and frank discussions around how you see things playing out, and what your vision for the business is. Get everyone on the same page. From day one.

A shareholders agreement which provides for matters such as clear decision-making processes, dispute resolution mechanisms, transfer restrictions, and minority shareholder protections can help prevent disputes and allow for effective resolution of disputes – it’s all about supporting the long-term success of the company. This rings true for any company, but particularly so for SMEs (also, often family-owned and/or multi-generational), where the shareholders are also working in the business. Knowing that these matters are addressed, agreed and everyone's on the same page frees them up to do what they do best. Work on the business!

It also ensures that the underlying relationship can be protected, whether that be a friendship, a familial relationship, or a long-standing business arrangement. Because whilst a company is the mechanism through which the business is run, it's really the people behind it who can make or break the business.

Interest piqued? Next week: The "what". WHAT should you consider including in a shareholders agreement?

I’m presenting on this topic in the coming months. Do you work for, with or advise SMEs? Please reach out if you’d like me to come to your workplace to present.

Phoebe Pitt

Special Counsel | Commercial Disputes & Insolvency | Mills Oakley

0466 553 643 | [email protected] | www.dhirubhai.net/in/phoebepitt/

#shareholdersagreements #disputeresolution #womeninlaw #riskmanagement

All comments are general in nature; I recommend seeking tailored advice for your business. I also don't recommend tightrope walking. Whether you're squirrel or human.