I am about to set up a limited company with several colleagues to start our own business. What should we do to formalise our business relationship?
It is important to set out in writing your duties and obligations to each other and this is usually achieved by means of a Shareholders Agreement.
When entering into a business relationship with others it is important to properly document the relationship between the parties. A Shareholders’ Agreement is a document that regulates the way the business of the Company is undertaken by the various participants.
Commonly the Shareholders Agreement will set out a list of matters that require the agreement of all of the shareholders before any alteration can be made, for example amending the Articles of Association or the share capital. This is a means of protecting shareholders holding minority shareholdings from being prejudiced. Alternatively, the list of matters could require, for example, at least 75% of the shareholders to agree to a particular course of action. This prevents the minority obstructing the will of the majority. A Shareholders Agreement will also typically include provisions for resolving shareholder disputes. In our experience, when these provisions are in place disputes are resolved in a more amicable fashion. Other matters that should be considered at this time include the employment status of the shareholders. If the shareholders are employees as well as shareholders they ought to have Service Agreements with the Company. Consideration should also be given to providing insurance in case one shareholder dies or becomes terminally ill and the other shareholders need to acquire his shareholding to allow the Company to go forward.
