Case Study 2 - Shareholder Agreements

Case Study 2 - Shareholder Agreements

Lucy and Sophie ran a PR company. They had worked together in a larger company previously and 12 years ago they decided to break away and set up on their own. At the beginning things were tight and they put all their money into getting the business up and running. They knew about shareholders agreements, but decided not to spend the money on solicitors straight away. They felt that they would be ok initially and that they would put a shareholder agreement in place in the second year once they knew that the business was going to be a success.

Things got busy and they never got around to seeing the solicitor about the shareholder agreement.

The business grew nicely and produced Lucy and Sophie with a nice income. They were both equal shareholders and directors.

However, over time relations between Lucy and Sophie started to deteriorate. There was no single catalyst, but they disagreed regularly with the way in which they both saw the business developing and the types of clients that they should target. Eventually things got so bad that they could not discuss anything without arguing. This had a detrimental effect on the business. It was no longer growing. Strategic decisions were not being taken and profits were falling. Clients sensed the problems and were leaving and employees felt that they were caught in the middle of the feuding owners and were either unhappy and therefore less productive or they left.

Without a shareholder agreement in place detailing how the dispute should be settled, it was down to Lucy and Sophie to resolve their differences. But they could not.

Their only option therefore was to wind up the company, if they could agree this course of action, or apply to the court for an order that the company is wound up, which would be an expensive process with no guarantee that the court would grant such an order.

A shareholder agreement could have included a detailed process for resolving disputes or remedying the situation if they really could not. The dispute resolution procedures can include requiring mediation, where a third party intervenes and attempts to encourage both parties to work through their issues, or it could allow one party to serve notice on the other offering to buy the other’s shares or sell their own shares at a single fixed price. This would ensure that there is a prescriptive procedure allowing for the dispute to be resolved one way or another and for the company to continue trading with the least disruption as possible.