Shareholder agreements and company insolvency

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Shareholder agreements and company insolvency – what you need to know

Updated: 20th January 2021

Shareholder agreements and company insolvency - what you need to know

Shareholder agreements offer clarity for companies in times of adversity, and can provide a safeguard against trading unlawfully if insolvency strikes. Allegations of trading whilst insolvent are serious if you’re a director, and you may be unaware of your obligations under these circumstances.

The Insolvency Act, 1986, states that if directors believe their company is insolvent or likely to become so, they must cease trading to put the interests of creditors first. So how can a shareholder agreement be influential in this situation, and what are the ramifications if you don’t have one in place?

An agreement tailored to your business

One of the benefits of a shareholders’ agreement is that it can be tailored specifically to your company, including how the business might develop in the future, and the way in which disputes will be resolved.

Instructions contained in the agreement take precedence over the company’s Articles of Association, and can prevent a stalemate occurring during board meetings. It will detail how particular situations should be resolved, including conflicts between directors or directors and shareholders, and allows a resolution to be implemented without undue pressure on individuals.

Shareholder agreements can be particularly useful in family-run firms, where conflicts often take on a unique standing as professional and personal issues collide. They also benefit minority shareholders who may otherwise have little influence on the outcome of important matters.

What will be included in the agreement?

A well thought-out, bespoke agreement might cover:

The issue and transfer of shares
Shareholder rights and duties
On what basis final decisions will be made, and how disputes are resolved
Voting powers
Exit strategies
Governance issues
Dividend policy and remuneration for directors
How the company will be funded

The agreement is between the company and its shareholders. It essentially lays down how conflicts will be resolved, preventing a potentially time-consuming and damaging in-house dispute.

Are there any specific risks if you don’t have a shareholders’ agreement?

The potential for dispute between shareholders, or shareholders and directors, is high when you consider the average life-time of a business. Insolvency is a particularly concerning example of where dispute could cause personal issues for directors, as well as further damage the company’s chance of recovery.

Here are just a few scenarios that are commonly experienced:

The company is under threat of insolvency
If the company is threatened by insolvency, directors can be equally split on whether the company should be placed into administration or enter a liquidation procedure. Should one party continue trading, all directors will face scrutiny of their actions pre-insolvency.
Family disputes
Arguments between family members can be resolved quickly by referring to a shareholders’ agreement, which runs alongside and takes precedence over, the company’s Articles of Association.
A stalemate in the board room
Stalemates can be avoided where a vote is 50-50 – the likelihood of a financial decline is greater in these circumstances as focus is placed on the dispute rather than on operational needs.
Minority shareholders
For shareholders with less than 50%, a formal agreement will protect their interests when important decisions are made. Majority shareholders may wish to take on additional borrowing, for example, or plan to issue new shares.

If you already have a shareholder agreement, it should be reviewed at least once a year to take into account new business circumstances, or a change in the market.

Real Business Rescue can advise on shareholder agreements and what should be included for individual businesses. Call our expert team for a free initial consultation, We have an extensive network of 100 offices offering confidential director support across the UK.