Importance of a Business Pre-Nup!
The benefits of a shareholder agreement
When you enter into a business relationship with another person, company or group of people 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 early 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, can set the parameters to help work out what happens in these types of scenarios. It can also set out how the Company or Partnership is to be managed and can supplement your Company’s Articles of Association with rules of engagement that are not put in the public domain at Companies House.
Before starting work with clients on a Business Pre-Nup I give them a questionnaire to help understand any particular requirements and to draft the most appropriate agreement. These questions also work as triggers to assist clients in thinking through the implications of the 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 spouses/partners/children, what happens if a director/shareholder is incapacitated/dies 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 wills with the Pre-Nup terms. Companies and partnerships may find it helpful to have a frank round table discussion and this can be facilitated by the professional adviser drafting the Pre-Nup.
Some companies are owned by two parties with a 50/50 split, couples, siblings or friends for example. I would strongly urge against a 50/50 split to help avoid 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 being 50/50 shareholders you could end in stalemate and the winding up of a Company.
There are other potential issues to consider, for example:
- One shareholder is not contributing equally to the day to day running of the business.
- The shareholders misunderstood each other’s role and requirements.
- There are differing expectations for the performance of the business.
- Excessive remuneration is being paid to one director to the detriment of the other.
- Excessive remuneration is being paid to both directors to the detriment of the business.
- There is 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, but 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.
- There is lack of communication.
- There is lack of control over spending by the other director or partner.
- Shareholders are getting involved in a competing business.
- There is no market for the shares after all the years of hard work and grind because of the 50/50 issue.
There are a couple of other options you might consider where the shares are split 50/50 including appointing a non-executive director (NED) who does not take part in the day-to-day management of the company and acts in a purely advisory role. A professional adviser should act in the best interests of the company rather than the individual shareholders and be impartial. He or she will have a vote that they will exercise in the best interests of the company rather than in the interests of one or other of the shareholders. Another idea is to also 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.