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The perils of not having a shareholder agreement – a true story

Do you have a shareholder agreement?

Hands up if there is more than one director in your business and that you all of you have shares.

And hands up again, if you have a shareholder agreement.

If you put your hand up to both, well done. You don’t need to read this blog and can treat yourself to a nice cuppa and put your feet up for the few minutes you’ve saved yourself the time.

If you put your hand up to the first, but not the second, you need to put the kettle on, make a cuppa and brace for yourself for this tale of what happened to me and a business I co-owned with three other directors. And which should (I hope) get you running to your nearest solicitor to get a shareholder agreement drawn up…

What is a shareholder agreement?

A shareholders’ agreement is, as you might expect, an agreement between the shareholders of a company. It can be between all or, in some cases, only some of the shareholders (like, for instance, the holders of a particular class of share). Its purpose is to protect the shareholders’ investment in the company, to establish a fair relationship between the shareholders and govern how the company is run.

The agreement will:

  • set out the shareholders’ rights and obligations;
  • regulate the sale of shares in the company;
  • describe how the company is going to be run;
  • provide an element of protection for minority shareholders and the company; and
  • define how important decisions are to be made.

The shareholders’ agreement will contain specific, important and practical rules relating to the company and the relationship between the shareholders. This can be beneficial both to minority and majority shareholders.

Taken from

For full details read this article

The story is dark and ugly and I still can’t believe the outcome, but I promise you it’s true.

Blissful ignorance (is not an excuse)

I joined a fledgling company as the Ops/Marketing director back in 2010. It was very exciting – I was joining three ex colleagues from another company we had all worked at. When I joined we had no clients and no money, so I continued on a part-time contract to keep me solvent until such time that we could start to pay ourselves.

Before I joined, it had been made quite clear to me that as a shareholder and director of the business, if I chose to leave within the first 12 months, then I handed my shares back in and got paid back the £10 I paid for them. There was no wiggle room – that was the deal, take it or leave it.

I settled into the job and discarded a load of work (actually, all of the work) done by a previous director on the basis it was rubbish and started from scratch.

We finally landed our first client and suddenly we were in business; finding consultants, getting them on-boarded, delivering the project and quite swiftly new clients followed. All was wonderful. We moved offices and took on an admin/resourcing assistant. We were on our way.

The ex-director from hell

About a year into the business, the hammer blow fell. The previous director contacted one of my colleagues and asked for his share certificate. To which he was told in no uncertain terms that he did not own any shares and he’d forfeited them when he left. He pointed out that he did, in fact, have shares. To the tune of around 22%. A scrabble around Companies House finally revealed that he was still listed as having shares.

Mistake no.1
This was mistake number one. The boys (as I shall call my fellow directors) hadn’t realised that when someone resigns as a director and who has shares, there are two forms that need to be completed for Companies House. The first being the form to resign as a director, and another to reallocate the shares. They had eventually got him to sign the director form, but had no idea there was a second form and thought that was that.

Lesson 1
If you have a resigning director who is also a shareholder and they need to relinquish their shareholding, please make sure that both forms are completed.

Mistake no. 2

There was no shareholder agreement. There wasn’t one when I joined but I was given a PowerPoint presentation. And it was perfectly clear what the agreement was.
The mistake was not so much that there wasn’t a shareholder agreement, although this was a major oversight (which we rectified, sadly too late), the mistake was there was no evidence that the conversation had taken place with the rogue director. There was no audit trail, nothing.
And this is exactly what he relied on. He knew damned well what the agreement was, but because there was no proof that he knew, we were basically screwed. Not to put too fine a point on it.

Lesson 2
Have a shareholder agreement. One that you have all agreed the terms for. And that is signed by everyone and copies are kept.

Lesson 3
If you haven’t got your shareholder agreement in place yet, get something documented and if it’s only an email to all concerned, get an audit trail in place to show that everyone is very clear about how shares are to be dealt with.

Without evidence you can’t win
What was as galling as anything, was he’d only been with the company for six weeks. At which point there was no revenue and we only got business about three to four months after he’d gone. And then he waited a year when he saw we were starting to go places.
There is no polite language for the low regard in which I hold this person. And that also goes for his lawyers – what moral compass do they have? They knew very well too what the situation was.

And so began the most awful 12 months of our lives. We couldn’t find a way out. He wouldn’t tell us how much he’d settle for, other than telling us we couldn’t afford it. And my fellow directors, one in particular said, he’d rather poke his eyes out with a burnt stick than give that specimen a penny of our money. There we were at an impasse with stubbornness and heel digging in from both sides. My cry of, shouldn’t we give him a door to get out of, fell on deaf ears, surrounded as I was by sabre rattling male co-directors and a team of male lawyers.

In the meantime, the legal fees mounted, we got nowhere. We looked at a solvent closure of the business, phoenixing our way out and the darkest moment; two of the directors actually met a PI to see if there was a way of digging up dirt on this low life scumbag and get him that way. When I found out I was horrified and got them to promise me they would never progress it. It had actually scared them, so in a way it was a good thing they at least spoke to someone to realise it wasn’t an avenue to explore. Not if we wanted any integrity maintained ourselves.

So we kept to the moral high ground. Let me assure you, in this instance it was a lonely and thankless place. But at least I could sleep at night. Except I couldn’t with the stress of it all.

Business suffered as a consequence
Attempts at mediation failed and we seemed doomed to be stuck in this horror story forever.
But not only were we battling with the lawsuit, we were having to run a business at the same time; which suffered as a consequence. He was effectively killing the golden goose, but couldn’t see it.
And worse, it caused rifts between the four directors. We each had different opinions on how to proceed and there were a lot of heated arguments and resentments bubbling over.

I was particularly distressed as I was having to pay legal fees for a situation that wasn’t of my making.

Salvation finally came in the form of an offer for the company to be bought. For a song. But the big string was we had to sort out the legal situation. What made us go for it, was that the directors were being offered fantastic money, plus share options because of their technical and business expertise in their field. And suddenly what seemed intractable, became something to sort out. Which was fine for those directors who were being offered the shiny new roles. Less good for me as I was back office guru and of course, the buying company already had marketing and operational functions so I was surplus to requirements. The company was saved – all the consultants got to keep their jobs and I and the part time accountant were the only two casualties. It was a real body blow to me, though I was delighted no other jobs were lost.

In order to settle, we had to get an independent accountant to value the business. And this was the final blow. I have no idea to this day what planet this accountant was on who valued our company. We had been tanking pretty badly for six months plus due to the situation and a severe downturn in the banking world who were our paymasters. For whatever reason, he valued the company at £500k meaning we had to pay lowlife scum-boy over £100k, and his legal fees to be free.

The whole exercise had cost us in excess of £200k.
It broke the company, completely destroyed my relationship with my fellow directors and broke me.

In summary, to bastardise the lyrics Bas Luhrmann’s song ‘Everyone’s free to wear Sunscreen’
‘If I could offer you only one tip for the future, have a shareholder agreement would be it.
The long-term benefits of shareholder agreements have been proved by scientists.’

Maybe not by scientists, but I’m sure there is a business guru out there who can prove it and I’m certainly living proof of it.

Trust me on the shareholder agreement.

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About the Author:

About Karen Espley, blogging for The Chameleon GuideKaren Espley of The Chameleon Guide works with ambitious small business owners on her Profit Accelerator Programme. She brings pragmatic and real world advice in a group setting to help her clients make a significant difference to their business through increasing profits and running a highly effective business.

Offering workshops and group profit programmes for companies wanting to reach their full potential.