What happens when you “break up” with a shareholder?

Yes, this is still a business column.

When you meet the love of your life, putting in place an agreement that says who will get what and how when you divorce is possibly the last thing on your mind, unless you are a Hollywood celebrity.

We don’t get married anticipating a break up. But sadly, many marriages do end up in divorce and not always in an amicable manner. Fighting over the CDs is one thing, fighting over the children is quite another.

The aim of a prenuptial agreement is to take some of the angst out of the breakup.

The aim of a shareholders’ agreement is the same. When you go into business, be it with your friend, colleague or family member, the plan is most often to build a successful company, and possibly even sell for a substantial sum in the future. But just like a marriage, this may not always work out as planned, and those people that you thought had the same aims and values as yourself turn out to be the very antipathy of your ideal; a break up becomes the only route.

Without a shareholders’ agreement in place, the only course of action is that of debate, and further debate, legal involvement, and yet more legal intervention. What this means is money – and lots of it – to find a resolution.

The court system in the UK will not intervene on a shareholders’ dispute, as this is a commercial agreement and the parties themselves need to find a way around the situation.

Although not a legal requirement, a shareholders agreement is a must and it’s something we put together when we are “dating”, rather than “divorcing”.

It can contain multiple points but here are some of the specifics

Be it a negative or a positive parting, a process needs to be in place to deal with who will buy the shares, and how they will be valued. What will you do if a third party wants to buy the business and one of you won’t agree on a sale? What happens on death of a shareholder? Do the sales pass into the diseased estate? Or back to the company? And what about the beneficiary position?

If you have the potential for a 50/50 split, then you will need a deadlock clause.

These items represent only a small number of issues, so take advice from someone who knows what may happen and is able to put in place the appropriate wording to deal with such eventualities.

We hope that we all remain in a long and happy marriage, and the same is so of a business match. But if it isn’t going to work out, it’s much better to have a method of resolution firmly in place at the start.

Jo Haigh is head of FDS corporate finance services and the author of “The Financial Times Guide to Finance for Non Financial Managers”. 

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