Importance of a Business Pre-Nup!
Benefits of a shareholder agreement
When you enter into a business relationship navigating the end of that relationship may not be the first thing on your mind but perhaps it should be. It’s perhaps the same if you plan to get married, divorce and protecting your assets isn’t likely to be up there with seating arrangements and wedding favours, unless perhaps you are a premier league footballer.
In the heady days of a new relationship it’s exciting and a life and a business together seems full of potential. But what happens further down the line, if one of you wants to leave the relationship, you have a debilitating accident, someone new makes a move on your partner, or you simply want to sell up and retire?
A Business Pre-Nup, also known as a shareholder or partnership agreement, sets parameters to help work out what happens in these types of scenarios. It clarifies how the relationship is to be managed and supplements the Articles of Association with rules of engagement that are not in the public domain at Companies House.
I give clients a questionnaire to help understand their particular requirements. These questions work as triggers to assist clients in thinking through the implications of various scenarios and where they want protection. Questions are as simple as how many shareholders or partners are involved? Is any funding being put in by the parties? What is the ownership percentage split? What happens to my shares if I have an accident and cannot work or I die?
Difficult questions like minority shareholders and their rights, share transfers to family, and other complicating issues have to be considered. Giving thought to the less pleasant scenarios before they happen is hugely helpful to help manage them if they arise further down the line. You might then also plan to align your will with the Pre-Nup terms. A frank round table discussion can help flesh things out and this can be facilitated by the adviser drafting the Pre-Nup.
Some companies are owned by two parties with a 50/50 split which I urge against to prevent future impasse. Is 50/50 ownership of your new business a fair reflection of what you've put in and may want to take out in the future? It's especially important as a stalemate could result in the winding up of a Company.
Other potential issues include:
- One shareholder not contributing equally to the day to day running of the business.
- Shareholders misunderstood each other’s role and requirements.
- Differing expectations for the performance of the business.
- Excessive remuneration being paid to one director to the detriment of the other or both to the detriment of the business.
- Insufficient access to company information, management accounts or cash-flow forecasts.
- One shareholder wants to reinvest the dividends for growth, the other wants dividend payments.
- One wants to sell the business, the other wants to keep it.
- The business does not live up to the expectation of one of the parties.
- Shareholders are locked in without the prospect of an exit.
- Lack of control over spending by the other director or partner.
- Shareholders getting involved in a competing business.
- No market for the shares after the years of hard work because of the 50/50 issue.
Other options you might consider where the shares are split 50/50 including appointing a non-executive director acting in a purely advisory role. A professional adviser should act in the best interests of the company and be impartial. Alternatively, issue shares to a trusted and impartial third party. In this way, shareholder voting is not deadlocked. Or you might consider whether one of you should have a 51% stake.
Obviously no-one ever went into business planning to have an argument but it pays to plan ahead.
Caroline Buchan
The Board Support at the Chambers of Miss C Buchan
9 Savill Road, Lindfield, West Sussex, RH16 2NY