What I am writing about today is business constitutions – whether for companies or partnerships of some sort. This note has been prompted by a very good Institute of Directors course I was at recently – and the number of shareholder disputes that I’ve had to deal with recently.
When things go wrong, they can go very wrong. That’s particularly the case when businesses are involved – partly because internal disputes can become business threatening. If there isn’t an agreed constitution in place, dealing with a dispute can become very expensive and will probably mean that those running the business have to devote a lot of their time to not running the business.
Articles of Association
So, what do I mean by a constitution? If I focus on private companies, every company will have Articles of Association. But, they may be in standard form, and not tailored for the circumstances of that company. Do they need tailoring by (for example):
- Dealing with the circumstances when a shareholder, or their executors, are forced to sell shares
- What price is paid for shares and in what circumstances
- Are any shareholders to have special rights
- And so on.
Much of these are what I might call “standard” changes to Articles. But, Articles are lodged with Companies House and so are a public document: so do you want private stuff publicly available?
Shareholders Agreements
The next step is a Shareholders Agreement. That might cover some of the same ground as the Articles but in a private way (as Shareholders Agreements do not have to be lodged anywhere) but they usually go beyond that. One of the things they usually do it to rebalance power between the directors and the shareholders: if no changes to the standard Articles are made, nearly all the power lies with the directors. So, Shareholders Agreements might cover:
- Providing financial information regularly to shareholders
- Preventing the directors from doing “non-standard” things without shareholder approval
- Limiting what directors can be paid
- And so on.
Family constitutions
So far, so good. But what happens as the generations pass and if the number of shareholders grows? Even well run private companies can run into difficulties at shareholder level. For example:
- What happens if a shareholder wants to sell. Can they, and if so, and what value?
- What happens on the divorce of a shareholder? Can the non-family ex-spouse get their hands on some shares?
- If the family are not the only shareholders, does the family have to vote as a block?
- Will the shares be held by a tight knit number of family members or will there be many (and possibly very many) family shareholders by Generation 5?
The more that can be agreed, the less the scope for a successful dispute. I stress the “successful” because you can’t stop people making daft decisions (sorry – I did promise not to mention Brexit…) but you can limit the chances of success.
Going forward
So, what do you do? Well, chatting to us or our colleagues in Family Business Solutions Ltd (www.ukfbs.co.uk) is a good start. We’ve probably dealt with the issues that you may face before and our experience will let us discuss with you issues that you haven’t thought of yet. It’s good to talk!
John Clarke is a Partner at Wright, Johnston & Mackenzie LLP.
Wright, Johnston & Mackenzie LLP is a full-service, independent Scottish law firm, with a history stretching back 165 years, operating from offices in Glasgow, Edinburgh, Inverness, Dunblane and Dunfermline. Further information on WJM can be found at wjm.co.uk
Wright, Johnston & Mackenzie LLP is authorised and regulated by the Financial Conduct Authority. FCA reference number 231170.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article