A cautionary tale for business owners

I was in a meeting with a networking associate the other morning. As a HR consultant she sees all kinds of horrific employment law issues and this one was no exception.

A client called to say his wife, who he was splitting from acrimoniously, had arrived at their business and ordered him to leave the premises. The wife informed him that she had purchased the shares of a minority shareholder which gave her a majority stake in the business and therefore the right to control its affairs. After the husband initially refused to vacate the building the police were called and he was forced to leave. Later, realising that the business could not function without the husband, the wife allowed him back onto the premises, where he now spends all his time (there's a mattress in the corner) working at the behest of his estranged spouse.

Although an extreme example, cases like this are not uncommon. Many accountants and financial advisers will suggest that husbands and wives split shares 50:50 in order to maximise the tax benefit. This arrangement is inconsequential while the personal relationship is good and the business is worth little. However, with nearly one in three marriages ending in divorce, legal measures should be put in place sooner rather than later.

There is a legal document called a shareholders' agreement which business owners should use as a means to regulate variety of issues such as the example above. The content of the agreement will cover matters such as, ensuring shareholders have first call on any shares being sold; what the dispute resolution procedure shall be if shareholders enter into conflict; and the process of fair valuation of the shares. 

For a shareholders' agreement to be valid all shareholders must enter into it, so its of little use when the shareholders are already in conflict. However, for newer companies with few shareholders entering into an agreement should be relatively simple. An agreement can be drawn up by a solicitor, or can be purchased over the Internet. Both have drawbacks; solicitors are often expensive making the process cost prohibitive to small businesses, while Internet based agreements don't explain what the terms and conditions mean. However, there is a third way; use a corporate governance consultant or company secretary. They will be cheaper than a solicitor and take the time to explain the content of the agreement. Prices tend to start at about £170 for a husband and wife (or civil partner) agreement.

Have you had a bad shareholder experience? Why not add a comment below?