“Business plans and budgets tend to exclude provision for legal documentation such as a shareholders’ agreement or joint venture agreement,” says Sonel Martin, a company and commercial law specialist with law firm Furley Page.
“It’s not until something goes horribly wrong or a party wishes to exit that thought is given to the legal and practical implications of the business relationship. That’s why it’s worth investing in a professionally drafted shareholders’ agreement when setting up a company with fellow business partners or entering into a joint venture,” adds Sonel.
“It will give all parties concerned direction, clarity and certainty as to the nature, extent and consequences of their relationship and will pave the way should any disputes or deadlocks occur, or should the parties wish to part ways or terminate the joint venture.”
A shareholders’ agreement can also provide for and deal with other important issues, including:
- board constitution and control of the management of the business;
- contributions of each party and how those contributions may be applied;
- agreeing and amending a business plan;
- terms on which shares can be transferred;
- distribution policy;
- reserved matters to protect any minority shareholders;
- confidentiality and restrictive covenants;
- ownership in intellectual property rights.
Although these matters could potentially be included in the company’s articles of association, most of them will not be included by default on the incorporation of a company and the parties would need to have the articles amended to include them.
In addition, the articles of association is a public document and any provisions included will be subject to company law, limiting the scope of bespoke provisions.
“In contrast, a shareholders’ agreement is a totally private document, and enforceable only between the parties, which means you have the flexibility to tailor the provisions according to personal requirements and circumstances,” says Sonel.
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.
Sonel adds: “Our experience is that, in the long run, the potential cost of unravelling an undocumented arrangement may far exceed the cost of drafting a shareholders’ agreement at the outset, even in the case of an initially small business operation.”