Why a 'pre-nup' is so vital to setting up a new business.
Byline: CARL SWANSBURY
WHEN individuals get together to set up a new company, they very rarely bother to have a shareholders' agreement drafted.
Such an agreement can best be described as a pre-nuptial pact for business partners.
Just as with a pending marriage, the initial focus is on the excitement of the new venture, not the potential for acrimonious disputes if things do not turn out as anticipated.
Those of us who are professional advisers see a shareholders' agreement as an incredibly important document and one which a lot of clients, with hindsight, wished they had entered into - but didn't manage to get round to when they should have done.
The purpose of a shareholders' agreement is to set out in a legally binding form exactly how decisions about the company are to be made and to agree how certain events - such as when shareholders wish to sell their shares - are to be dealt with so as not to disadvantage the remaining shareholders.
Drawing up a shareholders' agreement has the following key benefits: A shareholders' agreement is a cheap |way of minimising any potential for business disputes in the future by making it clear how certain decisions are to be made and providing a framework for a dispute resolution procedure.
The existence of a shareholders' agree-|ment can assist in raising finance from banks or creditors as it helps demonstrate the stability of the business.
Shareholders' agreements prevent sit-|uations where changes in one shareholder's personal circumstances can have a material impact on the company or other shareholders, safeguarding each shareholder's financial interest in the company and the interest of the shareholder's family in the event of a death. A shareholders' agreement protects the rights of minority shareholders and the investment value of their shareholding.
Without an agreement, majority shareholders may force issues that are not in the minority shareholders' interests.
Once in place, a shareholders agreement can only be amended with the agreement of all the shareholders.
If you are interested in discussing the benefits of having a shareholders' agreement drawn up, get in touch with experienced advisers who will be able to discuss this with you in detail and ensure the agreement is drafted correctly.
Carl Swansbury is partner at Ryecroft Glenton Corporate Finance