Pictured above: Geoff Brooke-Taylor

Business owners are being warned to ensure they have watertight shareholder agreements in place or run the risk of a perfectly healthy business having to be shut down. 

The warning comes from solicitors Alsters Kelley, who say that the failure to have such measures in place can threaten the future prospects of many businesses. 

Company Commercial department partner Geoff Brooke-Taylor says it is common for friends to start a business together and for each to hold a 50 per cent holding. Most such arrangements work well until either they fall out or one of the parties wants to go in a different direction for any one of a number of reasons, which may vary from retirement to bringing in new people or simply leaving the company altogether.

If there is no consensus on this area and an impasse develops, the only legal remedy is to go to court and seek a formal winding up of the business. In that situation, the assets will be sold, which usually means all the accumulated goodwill in the business has no value.

"The main value of a shareholder agreement is to formalise how things work when they would otherwise hit this legal brick wall," says Mr Brooke-Taylor. "It allows each party - and it does not just apply to two-person enterprises - to set out what they want. Without such an agreement it can be impossible for a business to move forward because, with very few exceptions, no shareholder can be forced to sell their stake in a private limited company.

"It will cover areas such as entitlement and liability for profits and losses, how minority shareholders are to be treated, the payment of dividends and so on. If there are minority shareholders there can also be provisions protecting them in certain circumstances. Crucially, it will also include a mechanism for resolving disputes outside the costly court process, whether by an option process for buying/selling the shares,  use of a mediator or other methods.

"It will also provide a mechanism for valuing the shares of a company, subject to the reality that shares in a private company are only worth what someone is prepared to pay for them. That is important as most limited companies start with a nominal share capital of a few hundred pounds when the business is worth a lot more.

"In many ways, there are parallels with the concept of a prenuptial agreement taken out before marriage but with the important difference that a shareholder agreement is 100 per cent legally binding.

"Many people assume that their new venture will be a success and that the founders will work in perfect harmony, but this is not always the case and the investment in a shareholder agreement at the outset will more than pay off in terms of saving financial and emotional headaches further down the line."