The time to repair the roof is when the sun is shining

15th July 2016

Every owner managed business operating through a company should consider entering into a shareholders’ agreement to regulate the way in which the owners manage their business.

Whilst business is going well and relationships between the owners are good, it may seem an unnecessary cost and formality to prepare such an agreement but in times of trouble, a good shareholders’ agreement will provide a clear framework to allow the business to continue to operate smoothly and owners to resolve any disputes quickly and cost effectively. As the name suggests, a shareholders’ agreement does require the agreement of all parties to it and therefore if you put off the preparation of a shareholders’ agreement until the point at which you need it (often a dispute) it will be too late. As they say, the time to repair the roof is when the sun is shining.

Each owner managed business will have its own idiosyncrasies that will need to be identified and provided for in a shareholders’ agreement but there are a number of common themes that are likely to be included as follows:

• Is ownership of the company intrinsically linked to management of the company? If so, then if an individual ceases to be involved in management they should be obliged to offer their shares up to the remaining/new management team.

• Restrictions on the transfer and issue of shares. If ownership is intrinsically linked to management then no shares should be capable of being sold to a third party who is not involved in management without the consent of the other owners.

• How many shareholders should be required to approve key decisions in the running of the business? Often this is calculated based on the number of shares held by the shareholders and the exact threshold chosen should ensure that the business is operated with the mandate of the majority of the shareholders and that no one minority shareholder has a veto.

Many owner managed businesses also benefit from putting share option schemes in place. A share option scheme is a scheme that gives certain individuals the right (an option) to be issued with shares at some given point in the future. It is commonly used to incentivise members of the management team who are not yet owners to work alongside the owners to achieve a common objective (for example a sale of the business). Often, it is worth structuring the scheme to ensure that it fits within HMRC’s enterprise management incentive (EMI) criteria.

If you wish to discuss any of the issues raised in this article please contact Henry Maples, Associate, on 01872 226998 or
henry@murrellassociates.co.uk.

The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at May 2016. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, May 2016.

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