French employers complain these days that it’s less risky to marry someone than employ them, since the state of French employment law is such that it’s easier to divorce a person than to fire them. And, in many respects, when we enter into business with someone, it is a bit like a marriage since we are entering into a relationship which will absorb most of our energies and wealth and, if it goes wrong, could be hugely expensive, painful and time-consuming to unravel.  Yet we come across many businesspeople who enter into important business relationships with the same dewy-eyed optimism as any love-struck teenager saying “we don’t need any shareholders agreement, we’re good mates, if anything goes wrong we’ll be able to sort it out”. Which is exactly what newly-weds say; and yet divorce lawyers still make a good living.

The reality is that, by the time things start to go wrong, it is far too late to discuss having a shareholders agreement since, by that stage, the shareholders will be eyeing each other warily, suspecting that any proposal put forward is designed to stitch them up, and generally lacking the goodwill necessary to get any binding agreement pushed through. A shareholders agreement is not a mechanism to repair a relationship that is going sour, it is a mechanism to stop it going sour in the first place by setting out an agreed set of rules to determine how the company is run.

Why do we need a shareholders agreement when we have articles of association? Is a fair question. Every company is required to have articles of association that regulate the relationship between the shareholders. You may not have read yours since the Company was set up, but they will be filed at Companies House (unless you amended them and forgot to file the amended version) and they will probably be one of the “template” articles established by the Companies Act: either the “Model Articles” if your company was set up under the Companies Act 2006, or “Table A” if your company was set up under the 1985 Act or the 1948 Act.

The Model Articles/Table A will usually be lightly amended by the company formation agent and typically they will set out the rules for convening board/shareholder meetings, payment of dividends, share rights, appointment and removal of directors, the procedure for transferring shares etc. They will rely on the Companies Act voting share thresholds for some actions, e.g. 50% + 1 share required to appoint or remove a director, and under the Companies Act can be amended by any shareholder controlling 75% or more of the voting shares (so if you are a < 25% shareholder the articles can be amended without your consent). If they are in standard “template” form, your articles may not deal with some of the following issues that it would be prudent to address:

1. Who can shares be transferred to? (you may be best mates with your business partner Jamie but less happy to deal with Jamie’s spouse or anyone else Jamie opts to transfer shares to);

2. Can a majority shareholder force his business partner to sell up if he receives a genuine 3rd party offer he wants to accept?

3. Can a minority shareholder tag-along if the majority shareholder wants to sell his shares?

4. Does a minority shareholder have the right to appoint a director? (if you are a 20% + shareholder you might feel you have a right to board representation);

5. Should there be a limit to the size of the Board to prevent the majority shareholder swamping the Board with his own appointees?

6. Should there be a dividend policy (either minimum or maximum dividend) that the shareholders should agree on?

7. Should there be rights of first refusal for the other shareholders on the sale of existing shares or the issue of new shares?

8. Should there be protections for minority shareholders to prevent certain matters happening without their consent (e.g. the issue of new shares, changes to the articles, a change in the nature of the business)?

9. Should there be non-competes preventing shareholders from competing with the business, running other businesses on the side, poaching customers etc?

10. How should the business be financed – new share issues, directors loans, external finance?

11. Should there be circumstances where a shareholder is obliged to sell his shares e.g bankruptcy, incapacity, death, breach of agreements?

The above are just a flavour of the sorts of issues that you may wish to set out as a rulebook for the running of your business, to avoid any misunderstandings in the future. A shareholders agreement can also set out a mechanism for resolving disputes that do arise, whether by mediation or a buy-out clause whereby the disgruntled shareholder can sell his shares for an agreed value and move on. Some of these provisions can be set out in a shareholders agreement and some in a better set of articles. The advantage of a shareholders agreement is that it is a private document that does not need to be filed at Companies House, so you can include provisions naming individual shareholders that it would be embarrassing to have on public view; also, unlike the articles, a shareholders agreement can only be amended if all the parties to it agree.

So, even if you trust your best mate Jamie with your life now, think what might happen if Jamie:

• Dies;

• Falls into the bottle;

• Marries someone horrific;

• Takes up with someone 20 years younger;

• Gets bored;

• Joins a cult;

And stops being someone you can rely on; then, if you have a properly drafted shareholders agreement, you will have a template for keeping those problems out of your business.