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21 October 2015

Shareholder agreements can save your business a lot of trouble in the long term.

With all the excitement, trepidation and sheer hard work that goes into starting a new business, you might be forgiven for never thinking of a Plan B.

Yet even if detailed legal documentation is not high on your priority list, it could prove to be a vital safeguard for your interests.

“Business plans and budgets tend not to provide for legal documentation such as a shareholders’ agreement or joint venture agreement,” says Tony Müdd, divisional director of development & technical consultancy at St. James’s Place Wealth Management.

It’s not until something goes terribly wrong or someone wants to leave the business that any thought is given to the legal and practical implications of the business relationship, Müdd points out.

That is why, for anyone who is setting up a company with business partners or entering into a joint venture, he strongly recommends investing in a professionally drafted shareholders’ agreement.

Tailor-made

The purpose of such an agreement is that it gives clarity and certainty to everyone concerned as to the nature, extent and consequences of their relationship. It prepares the ground in case of any disputes or deadlocks. It also provides a framework if one or more of the parties decide that they want to part ways or to terminate the joint venture.

A shareholders’ agreement can also provide for and deal with other important issues, such as how the board should be constituted and who controls the management of the business. It can stipulate the respective contributions of each party and how those contributions may be applied, as well as the distribution policy for any profits. It can incorporate protections for any minority shareholders and, in the case of a partner leaving the business, specify confidentiality and restrictive covenants, as well as ownership of intellectual property rights.

These eventualities might be covered in in the company’s articles of association. However, most of them will be excluded by default on the incorporation of a company, so you would probably need to have the articles amended to include them.

But there are good reasons not to go down that path. Among them is the fact that the ‘articles of association’ is a public document, which means all provisions included will be subject to company law. That would limit the scope of any bespoke provisions.

“By contrast, a shareholders’ agreement is a totally private document, and enforceable only between the parties,” Müdd notes. “That means you have full flexibility to tailor the provisions according to your personal requirements and circumstances.”

Exit insurance

Depending on the parties’ exit strategies, it is also worth considering putting relevant insurances in place, coupled with cross-options, to ensure value for a leaving party.

“In the long run,” Müdd says, “the cost of unravelling an undocumented arrangement may far exceed the cost of drafting a shareholders’ agreement at the beginning, even in the case of a business operation that starts out small.”

 

Please note that if advice is required in this area, it will necessitate the referral to a service that is separate and distinct to those offered by St. James's Place. 

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