Being a shareholder, company owner or partner in a successful business can be an enviable position. But it also brings with it a range of challenges, from wanting the business to be successful to ensuring that you enjoy your fair share of the returns. Other key issues can include succession planning, which is covered in the ‘Exit strategies’ section of the Law Donut.
Identifying what you are trying to achieve and anticipating potential problems can help you reach your objectives.
A company’s articles of association typically set out basic rules for how a company operates: for example, how directors are appointed and what rights shareholders have. You can use the articles of association or a separate shareholders agreement to cover other key issues that are important to you.
Key issues in a shareholder agreement can include overall business strategy, how management decisions are taken and who has responsibility in different areas, what will happen if the business needs to raise additional financing, for example.
The articles of association or shareholders’ agreement can also govern how the company is controlled, such as what voting rights shareholders have and how directors take decisions. In private companies, the articles of association or a shareholders’ agreement often include restrictions on share transfers aimed at preventing outside investors taking control.
If company ownership is shared between shareholders who work in the business and passive investors, you may also want to consider issuing different classes of shares with different rights. For example, family businesses have sometimes issued non-voting shares to external investors.
Your rights as a minority shareholder are protected to some extent by the Companies Act and other laws and legal precedents. For example, directors are required to treat shareholders equitably.
In practice, minority shareholders can find themselves disadvantaged, particularly where ownership and management control are concentrated with another individual or group. Again, a shareholders' agreement or the articles of association can provide useful protection. For example, minority shareholders’ consent might be required for transfers of significant assets, remuneration above agreed levels or contracts between the company and any of its’ directors or shareholders.
Similar considerations apply to partnerships. Under partnership law, unless agreed otherwise partners have a right to equal shares in profits and an equal say in how the business is managed.
A written partnership agreement can set out how the business is to be managed and what partnership rights each partner has.