With both UK and EU businesses now facing far more challenging circumstances than they have become accustomed to in recent years, Rowlands Solicitors is highlighting the importance of shareholders' agreements in preventing disputes between shareholders.

It is very common for companies to be acquired 'off the shelf' and, in their enthusiasm to get the business up and running and money coming in, the shareholders often give little or no thought to the relationships between them or the constitution of the company. In the present economic climate where the pressures facing business owners make disputes all the more likely, failure to put in place an appropriate shareholders' agreement could prove an enormous oversight.

Paul Matthews, partner and head of the Commercial Team at Rowlands Solicitors, commented: "By establishing a shareholders' agreement, companies can avoid or at least contain issues that could otherwise develop into full blown disputes. The agreement typically covers matters such as ensuring that minority shareholders are appropriately protected, putting in place a deadlock resolution procedure and setting out appropriate procedures for and restrictions on the transfer of shares. With the UK and many EU countries approaching or already in recession, the last thing business owners need is to be dealing with stressful disputes, when they could be devoting their time and energy into cementing the ongoing health of the company."

There are many costly, emotionally strenuous and time consuming situations that companies and their shareholders find themselves in, which can be prevented by ensuring that an appropriately drafted shareholders' agreement is in place.

Rowlands' guidelines on provisions that should be included in any shareholders' agreement:

Protection for minority shareholders
The shareholders' agreement should provide adequate protection for minority shareholders with a significant stake in the business. It is common for a participant who has fallen out with the others to become very marginalised. This may lead to their removal from their office as a director and consequent exclusion from the day-to-day management of the company.

Voting Provisions
The agreement should lay down circumstances where a simple majority vote is not considered adequate, such as on borrowing a significant sum of money.

Deadlock resolution
The agreement should establish an appropriate deadlock resolution procedure.

Buying shares of fellow participant
The contract may provide the continuing participants with the right to buy the shares of a participant who has ceased to be actively involved in the company, avoiding the undesirable situation of having to deal with shareholders who no longer play any role in the company.

Dividend policy
A dividend policy should be included to avoid disagreements when it comes to deciding what to do with yearly profits.

Sale of the business
The agreement may detail a procedure for dealing with a situation where a minority shareholder wants to block a sale of the company, which the majority wish to progress.

Transfer of shares
Appropriate provisions should be established in relation to the transfer of shares. It is essential that restrictions apply so that outgoing shareholders cannot transfer their shares to whoever they choose, contrary to the wishes of ongoing participants. However, it is equally inappropriate to limit any transfer to approval by directors – this could result in a situation where it is impossible for a shareholder wanting to sell their shares to do so.