When you set up a business you don’t plan to fall out with your business partners. You don’t plan for one of you to be hit by a major health issues. You don’t plan for anyone deciding to take their foot off the gas and work fewer hours.

So what happens when something affects the status quo?

Ideally, you have a Shareholders’ Agreement or Directors service contracts in place. They’re extremely important documents to the long-term health of your business.

If you have a 50:50 split of ownership with someone, it means you make decisions together and, sometimes, have to learn the art of compromising. But if you fall out and stop cooperating, your business is in stasis. You can’t operate if decisions can’t be made. That’s not good for the financial health of your business – not to mention the emotional health of both parties.

This is particularly difficult when there are staff involved and, there is a danger of one director feeling pressured to make a decision, simply to keep the business going, then being accused of fraud by the other director. It all goes legal and gets very messy.

What do these agreements cover?

Director’s service agreements and Shareholder agreements sit alongside the Articles of Association. Model articles are usually adopted, but they’re pretty nondescript, as they apply to all companies, regardless of industry and type. Directors service agreements and Shareholders’ agreements are specific to your business,

Directors Service Agreements lay out the roles and responsibilities of the director, like any employment contract it will dictate hours worked, holiday etc.

The Shareholders Agreement will detail (for example):

  • How the profits of the company are to be shared
  • What happens if one of the shareholder/directors dies or suffers a long-term health issue
  • What actions should be taken if all parties involved fall out irrevocably

It details all the practical aspects of running a business with more than one decision-maker.

It’s something that should be discussed at the outset, but probably isn’t – but that doesn’t mean that you can’t draw this up at any stage of your business’s journey.

One specific point to consider when drafting a shareholders agreement is life insurance to cover the share value of the other parties involved in the business.

While most people want their families to benefit from the work they’ve put into building a business, and will leave the shares in the business to their families in their will, in reality, most families aren’t interested in getting involved in the management of that business. It’s important in some cases that the surviving parties of the agreement have a life insurance pay out to be able to buy the shares in the company from the estate of the deceased.

This allows the business to continue unhindered.

If you have not yet created your Directors service agreements or Shareholders’ Agreement, ask your accountant or solicitor to draw it up based on your unique situation and requirements.