What is a Shareholder’s agreement & why is it important?

A shareholder’s agreement is a set of rules and conditions that affect a running of a company.  Basically if you have a company with more than one shareholder, then this document is absolutely necessary to preserve the company and its relationships with the shareholder and directors, where you have external stewards running the company for you.

So what does it do?  Unlike the articles of association, this provides a more detailed set of rules and covers most scenarios that may effect a company during its lifetime.  During the life a of company a lot can happen and people’s circumstances change all the time.

The most common change of circumstance is a divorce or remarriage. However what people rarely consider is incapacitation, ill health, or long term illness.

When this happens, then you need a shareholder’s agreement to give guidance on how to deal with such circumstances, and stabilise the business providing stability and giving your creditors a level of comfort to continue their business with you.  This is particularly important where your business is a property business, and your main creditors are your mortgage providers who would all have a charge on the assets.  If you have a long term illness or are incapacitated in any way, your business bank account will be frozen within 24 hours of been notified, which means your direct debits will not be paid, and hence your mortgage payments.  These days if you miss two consecutive payments your mortgage lender will apply for a possession order.  Though the application can take few more months, the clock starts ticking from the moment the bank gets notified. Historically, the courts have been reluctant to give any such orders, in which case the lenders have tried to enforce the personal guarantees, which could put everything you own at risk, as they can then file for bankruptcy.

A shareholder’s agreement could prevent this, as you can nominate a person or a company to manage your business for you, giving them clear directions to cover how they should deal with various scenarios they may face in running your business for you including any remuneration for their services.  However a shareholder’s agreement alone will not deal with such situations.

A Business Power of Attorney

Normally people have a Power of Attorney to cover their wealth, i.e. money and property, and health, i.e. health and welfare.  The money and property Power of Attorney will suffice if you are a sole director/ proprietor in your business.  However if you have multiple shareholders and directors, then you will need a Business Power of Attorney to provide a business continuity and protect your own interests in the business.  The actual process is very simple and the government current fee is only £82 to register such with Office of Public Guardian.

What it does?

It gives the person who you authorise to act on your behalf, and execute agreements, etc, as you would, managing your business affairs on your behalf.  If your bank account gets frozen then this document will be required for you to get the account fully operative, and it will assist you with getting mandated for bank transaction purposes.

What a Business Power of Attorney also does is it tells the other directors and shareholders that you have someone in place to help manage your interests in the business.  In cases of disputes and disagreements, this could be particularly useful in resolving matters.

Get in touch if you need further advice and guideance on setting up a shareholders agreement and business power of attorney.

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