The importance of a Shareholders Agreement…

Two friends set up a company together.  They were both directors and both equal shareholders of the company. 

The company purchased two properties. 

A dispute arose between the friends, with one of them wanting to sell the properties to get the cash they had contributed out, while the other refused.

The parties never had a Shareholders Agreement in place and didn’t make any agreement around the sale of the shares, or of the properties. 

Although there is a power in the Companies Act for a majority shareholder to vote to remove a director (therefore allowing the other director to act alone to sign agreements), neither of them had the majority, and were at a stalemate.

After a lot of stress, cost and time, they ultimately ended up attending a mediation, and agreeing that one party would buy the other’s shares, and essentially take over the company.

Had there been a Shareholders Agreement there would have been agreement as to what would happen if one party wanted to sell their shares, or the properties, and a clear process to follow in that circumstance.

Shareholders Agreements are vital to record arrangements between shareholders.  Although it may be amicable when you set up a company with a friend or family member, it is much easier to sort out any disputes in the long run if you have put something in writing between each other at the outset.

It is vital to take advice before you become a shareholder to ensure you are aware of your rights.