According to the UK's Office for National Statistics (ONS), there has been an increase in the number of new business set ups. Last year, the total business population increased by 0.8%, adding 46,000 new businesses. This growth continues a broader trend, with the total business population growing by 24% from 2010 to 2023.
Additionally, the Federation of Small Businesses (FSB) highlights that the number of small businesses in the UK has risen, with small and medium-sized enterprises (SMEs) making up 99.9% of the business population. In the complicated world of business ownership, the relationship between shareholders can significantly impact the success and stability of a company. At Bennett Oakley Solicitors, we understand that a well-drafted shareholders agreement is essential for protecting the interests of all parties involved.
Here are some reasons why your business needs one:
1. Clarifies Ownership and Management Roles A shareholders agreement clearly defines the ownership structure of the company, outlining who the shareholders are and the percentage of shares each holds. This document also establishes the roles and responsibilities of each shareholder, ensuring there is no ambiguity about who has decision-making authority in different aspects of the business. This clarity helps prevent conflicts and confusion, fostering a more harmonious working relationship.
2. Provides Mechanisms for Dispute Resolution Disputes among shareholders are not uncommon, but a shareholders agreement provides mechanisms to address and resolve these conflicts efficiently. It can include mediation and arbitration clauses, which offer a structured approach to dispute resolution, potentially avoiding lengthy and costly litigation. By having predefined methods for handling disputes, shareholders can resolve issues quickly and maintain focus on business operations.
3. Protects Minority Shareholders In many businesses, minority shareholders often feel vulnerable to the decisions of majority shareholders. A well-crafted shareholders agreement includes provisions that protect the interests of minority shareholders, ensuring they have a voice in critical decisions. This protection can include requiring a supermajority for certain decisions, granting minority shareholders the right to appoint directors, or outlining specific actions that require unanimous consent.
4. Outlines Exit Strategies and Share Transfers Circumstances change, and shareholders may wish to exit the company or transfer their shares. A shareholders agreement details the process for selling or transferring shares, including the right of first refusal for existing shareholders and valuation methods for the shares. This prevents unwanted third parties from acquiring shares and ensures a smooth transition when changes in ownership occur.
5. Sets Dividend Policies Disagreements over profit distribution can be a significant source of tension among shareholders. A shareholders agreement can establish clear dividend policies, detailing when and how dividends will be paid. By having a predetermined approach to profit distribution, shareholders can avoid disputes and ensure a fair and transparent process. 6. Facilitates Business Continuity and Succession Planning In the event of a shareholder’s death, disability, or other unforeseen circumstances, a shareholders agreement can provide a plan for business continuity. This includes buy-sell provisions, which specify how a shareholder's interest will be managed or transferred. Succession planning ensures the business remains stable and operational, even during challenging times.
7. Enhances Investor Confidence Potential investors often look for businesses with solid governance structures. A comprehensive shareholders agreement demonstrates that the business is well-managed and that there are clear rules governing shareholder relationships. This can enhance investor confidence and make the company more attractive for investment.
At Bennett Oakley Solicitors, we emphasise the importance of a shareholders agreement for any business with multiple owners. This critical document lays the foundation for clear communication, effective conflict resolution, and long-term stability.
Whether you are starting a new business venture or have an established company, a shareholders agreement is essential for safeguarding your interests and ensuring the smooth operation of your enterprise.
For expert legal assistance in drafting or reviewing a shareholder’s agreement, contact Managing Director and Commercial lawyer, James Leighton today.
