Headshot of David Southwood - Solicitor at Everingham Solomons TamworthPeople commonly operate a business through a private company. A typical structure involves the business participants as being both directors and equal shareholders of the company.

When a company is created, there are basic rules that govern its affairs, however these rules do not address commercial decisions a company must make. For so long as everyone gets along, this type of basic company arrangement works well.

However, if there is a breakdown in the relationship between the business participants, problems can emerge. For example, the business participants may be unable to reach agreement about the future of the business. This type of situation is commonly called a “deadlock”.

If a deadlock emerges, people are often surprised to hear that there are limited options to resolve a deadlock. For example, there is no mechanism by which one shareholder can require another to sell their shares to them. Further, the Courts are reluctant to involve themselves in commercial disagreements between shareholders.

However, there is a solution – it is called a “Shareholders Agreement”. A Shareholders Agreement is a contract between shareholders in a company and its purpose is to provide greater detail about the operation of a company and resolution of deadlocks. For example, a Shareholders Agreement can contain mechanisms that require shareholders to sell their shares or buy those of another shareholder.

The key takeaway is this: if you a starting a company with others, you should enter into a Shareholders Agreement. It will provide certainty and assist in resolving deadlocks, which allows you to focus on your business. If you would like further information regarding a Shareholders Agreement, Everingham Solomons would be pleased to assist as Helping You is Our Business.

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