Friends and Family in Business: The Importance of Articles of Association and a Shareholders’ Agreement

Specialist corporate solicitor, Joe Metcalfe, discusses the importance of documenting agreements in respect of friends and family in business together.

Going into business with friends or family can seem appealing, but the expression "never mix business with pleasure" should never be overlooked. While many successful businesses are founded on personal relationships, there are equally numerous instances where such ventures have failed, leading to strained relationships and financial losses.

The importance of Articles of Association and a Shareholders’ Agreement

When friends or family embark on a business venture together and set up a company, it is vital to ensure that you have comprehensive Articles of Association and a Shareholders’ Agreement in place. These documents provide a foundational framework that clearly outlines the rules about running the company and each party's rights, obligations, and expectations. Without these in place, misunderstandings can arise, leading to friction and disputes that may jeopardise both the company and personal relationships.

Key Considerations in Articles of Association and a Shareholders’ Agreement

To mitigate potential conflict, comprehensive Articles of Association and a Shareholders’ Agreement should address several key considerations:

• Share Transfer Provisions: Outline the process for transferring shares, including rights of first refusal and restrictions on transfers to third parties. This ensures that existing shareholders have control over who becomes a shareholder in the company.
• Death or Incapacity of a Shareholder: Specify what happens to a shareholder's shares upon their death or incapacity. This might include provisions that allow the remaining shareholders to purchase the deceased's shares, thus preventing unwanted parties from becoming shareholders.
• Decision-Making Processes: Establish clear procedures for making significant business decisions, including voting rights and the required majority for various actions. This can help prevent deadlocks and ensure smooth operations.
• Dispute Resolution Mechanisms: Include provisions for resolving disputes, such as mediation or arbitration, to avoid costly court proceedings. This can save time, money, and preserve relationships.
• Exit Strategies: Define the terms under which shareholders can exit the business, including valuation methods for shares and any conditions that must be met.

Avoiding Common Misconceptions

Many friends and family members mistakenly believe that their personal relationships will prevent business disputes from arising, leading them to proceed without putting any formal agreements in place. This misconception can be detrimental; comprehensive Articles of Association and a Shareholders’ Agreement are not merely a precaution, but a protective measure that safeguards both the company and personal relationships.

Additionally, some view having comprehensive Articles of Association and a Shareholders’ Agreement prepared as an unnecessary expense. However, the costs associated with resolving disputes in the absence of such formal agreements can far exceed the initial investment in legal advice and documentation.

Conclusion

While the prospect of going into business and setting up a limited company with friends or family can be enticing, it is imperative to approach it with caution. Ensuring that you have comprehensive Articles of Association and a Shareholders’ Agreement in place at the outset can prevent misunderstandings and conflicts, ensuring that both the company and personal relationships remain intact.

Expert legal advice

If you require any assistance in connection with your business, please contact our team of experienced corporate and commercial solicitors who would be happy to assist.