Without a Shareholder Agreement You Could Lose Everything!

14 MAY 2019 COMMERCIAL & BUSINESS LAW
Without a Shareholder Agreement You Could Lose Everything!

Without a Shareholder Agreement You Could Lose Everything!

In a recent case, two entrepreneurs purchased a company with a multi-million-dollar annual turnover. They contributed equally to the purchase price and costs. They had equal numbers of shares in the company. Their solicitor advised them that they should have a "shareholders agreement" and they agreed.

The business traded successfully until the two entrepreneurs had a serious disagreement about the management of the business. One of the entrepreneurs claimed to be doing more work than was required of him in the shareholders agreement. The other shareholder rejected this and said that he was doing everything required of him. Tensions grew between them. Their communications became virtually non-existent. They both concluded that they could never work together.

The entrepreneurs asked their solicitor what should happen to their shares in the company now that they decided to go their separate ways. The solicitor said that the first step was for them to read the shareholder agreement because he knew that it included clauses covering the exit of a shareholder. However, when the entrepreneurs read the shareholder agreement they discovered that it had not been signed. The effect of this was that the document was not binding on them. The matter seemed to be headed for court which would have resulted in significant costs. Luckily, the two entrepreneurs agreed to sign the agreement retrospectively, meaning it would function as if they signed it on the day it was completed. The shareholder agreement specified how the shares of the departing shareholder would be valued and the conditions under which they had to be sold.

This case demonstrates the importance of shareholders agreements. They can provide some certainty and avoid costly, drawn out disputes. It also shows the importance of signing documents once they are prepared.