SME Shareholder Agreements – preventative medicine
I have recently acted in a number of SME (small to medium size enterprises) shareholder disputes requiring my disputes and insolvency expertise. These disputes came about as result of diminishing profits and the financial pressures then faced by the directors. I have seen many other triggers cause a serious breakdown of trust between SME owners and a consequent dispute or management deadlock.
The disputes have included allegations of a majority shareholder unfairly earning too much, a shareholder simply wanting to retire or wind down their involvement and a breach of duty by one director. Once trust has been lost between directors or shareholders, the dispute can quickly become too difficult to settle. A useful tool for helping to prevent these disputes, or to aide their quicker resolution, is to start the relationship with a bespoke shareholders agreement, negotiated after independent advice. This is even more advisable when one of the shareholders will be a minority and/or not work in the business. Most shareholder disputes I have been involved in have lacked such an agreement.
It surprises me that some shareholders are reluctant to spend the costs required to each obtain independent objective accounting and legal advice on the SME structure, including on shareholder agreement terms. SME shareholders sometimes just rely on basic shelf company constitutions, without considering any amendments. That is a naive way to start a business relationships – with no tailored rules.
Some key matters a shareholders agreement can address are:
- Access to company records/accounts and a possible right to audit
- Right to attend management meetings/ have board representation
- Triggers to a solvent winding up
- Level of funding obligations and the security each might provide in support
- Directors fees
- Dividend policy
- Share buyout triggers and the share valuation method
- Ownership of any introduced assets
- Limits on directors authority to contract/ borrow etc without unanimous shareholder approval
- Key employment terms for the GM
- Vote deadlock breaking mechanisms
- Pre-emptive share purchase rights
- Pre-agreed restraints on departing directors/shareholders
These examples seem to be obvious matters that SME shareholders should discuss and agree at the start of their relationship. Once they are in dispute, it is too late.
Whilst many shareholder disputes can be negotiated to a resolution, such as via a buyout, the delay and costs in that process will usually substantially exceed the costs of negotiating a shareholders agreement at the outset. Business goodwill also suffers in the interim. A deadlock can also ruin the business.
There are court remedies available when negotiations fail, such as:
- A suit by a minority to avoid their oppression; or,
- A just and equitable winding up.
These are public, costly and the results can be uncertain.
At Surry Partners, we are regularly involved in helping SME promoters structure their affairs or in assisting to resolve shareholder disputes.
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