I’ve been working in and with accounting firms for thirty plus years and one of the things I’ve observed is just how important having a good shareholder agreement is. For some firms this will be known as a partnership agreement because they operate as a partnership, but increasingly this is being superseded by a corporate structure. For the purpose of this article I’m going to call the equity holders shareholders.
Ultimately you will want to have the input of a lawyer when you prepare your shareholder agreement. What I am giving you is not legal advice but rather some observations about the practicalities of these agreements and some reasons why they are so important.
Arguably the greatest value from a shareholder agreement is when things turn “pear shaped”, which is typically when disagreements occur between shareholders about running the firm. Not just minor disagreements which inevitably arise and are dealt with, but the more fundamental differences of opinion about the direction of the firm, strategy, owner remuneration or other significant matters. What a good shareholder agreement will do in these circumstances is provide a structure and process for these matters to be dealt with. This may ultimately include how a person exits the firm.
Here are 11 things that I believe every accounting firm shareholder agreement should cover:
- Shareholding structure, governance, management and voting rights
- How new shareholders enter
- How shareholders exit
- Valuation of the firm – which is relevant for 2 and 3
- Roles, responsibilities and remuneration of shareholders
- Dealing with absences from the firm – leave, illness or other circumstances
- Death, disability or unacceptable performance
- Leave and other entitlements
- Restraints (including outside interests) and confidentiality
- Dispute resolution
This is not a definitive list and there is a lot of devil in the detail. My advice is always to think of every possible thing that could go wrong and put something in the agreement about how to deal with it.
Sadly, I have seen instances where things have not gone well and there has been no shareholder agreement in place to guide how they should be dealt with and bind people to a particular process. This rarely ends well. Please don’t let this be you.
I know when you start out in business with one or more other people it is all very positive and you can’t imagine anything other than smooth sailing. My advice is to do everything you possibly can to ensure smooth sailing but have a robust shareholder agreement that envisages storms, cyclones, tsunamis and other turbulent events. Expect the best and behave in ways to support that, but do so knowing you have a safety net in place. If things really do go sour there is a framework in place to deal with it.
Of course dealing with the “bad” stuff is not the only reason to have an agreement. It is also really important to guide succession and new owners coming into the business.
A great deal of the value of the agreement comes from the certainty it provides. Everyone knows that if X happens then Y follows or if G happens H will occur, and so on.
Over the years I’ve spent a bit of time reviewing and discussing shareholder agreements and assisting with “interesting” situations. So if you want a practical input on your agreement or situation I’ll be pleased to assist.