Who, what, why, when and how. These are the key questions relating to your company structure that a Shareholder Agreement can help keep track of.
Much of the time, new businesses are formed on a relatively informal and intimate basis. Like any good romance, a business relationship starts with some innocence and chemistry, but the day-to-day stresses and strains of running a company together can have the effect of turning endearing foibles into irritating habits.
When Clara and Adam set up Equality IT Ltd together, they both invest the same time and capital, and it’s fairly obvious that they will have equal shares and equal rights. They award themselves 50 shares each. But wait… business relationships have the potential to be even more complicated than marriages.
Funds are tight, so when a third friend, Victor, offers to set up the IT system in return for shares in the company instead of cash payment, it seems too good a deal to decline. Clara and Adam each sign over five of their shares to Victor.
Friend Four, Emma, who works for a top PR company, comes along and offers her marketing expertise. She knows cash flow is a problem at the moment, so offers to put in a few weekend hours for free… as a thank you, the partners decide to give her a present of a couple of shares, issuing new ones this time, it’s just a token, but…
The original romance now feels a bit crowded. Suddenly, nothing is as straightforward as it once seemed.
The Shareholder Agreement is a means of keeping track of each of these changes. Yes, they may be recorded in the minutes of board meetings (if you actually take minutes), but the board minutes are unlikely to go into as much detail, particularly concerning future eventualities, such as what happens if Victor or Emma decide to sell their shares. Add to that, board minutes are not usually legally binding on the parties in any event.
The Shareholder Agreement also clearly lays out what these share allocations mean – Victor may think that he can now cast the deciding vote in any dispute, but the original partners may have intended his shares to be non-voting, that is, allowing Victor a share of the profits, but not a say in the company’s day-to-day business. A Shareholder Agreement can make all of this clear, preventing future discord.
In a proverbial nutshell, a Shareholder Agreement can set out: who owns what; when and why (if relevant) it was allocated to them; what the allocation means (the individual rights of the shareholders); and act as an aide-memoire, in the event that shares were agreed but not actually officially issued for any reason.