Farm Business Structures Part 4: Do I need a shareholders’ agreement for my farming business?
Tom Potts, from our corporate team discusses key aspects of agricultural business structuring in a series of articles, providing information on the different options and helping you identify the best option for your farm.
Whether you have been operating your company for years or have recently set one up as part of an incorporation exercise, it is worth giving some thought to the rules which govern how it is run.
If you have never had your solicitor draw up bespoke Articles of Association and/or a Shareholders’ Agreement, it is likely that these rules will be those set out in the Model Articles (or, for older companies, “Table A”). There are some significant limitations to these Model Articles that mean they may not be appropriate for your farming business. For example:
- There are no limitations on the transfer of shares, meaning each shareholder is free to transfer their shares to whoever they want. This could be especially problematic if your intention is to keep your farming company a family business.
- Where there is a single class of shares, all shareholders must be paid dividends at the same time, in proportion with their shareholdings. There is no flexibility to pay different shareholders different dividends in order allow the shareholders to take income from the business in the most tax-efficient way.
- No shareholder can be forced to transfer their shares in any circumstances. This could be an issue, for example, if a shareholder transfers some shares to their spouse but they later divorce, as there is no easy mechanism to recover these shares under company law.
- There is no procedure for resolving disputes, which can result in decision-making becoming deadlocked and ultimately forcing the closure of the company.
- There is no automatic right for each shareholder to participate in the day-to-day management of the company as a director.
- If you are a minority shareholder, your rights to be consulted on key decisions are limited. For instance, there is nothing to stop the directors from selling the assets of the business or incurring debt without your consent.
Most clients choose to address these issues (and more) by putting in place a Shareholders’ Agreement. Unlike the Articles of Association (which are a public document that anyone can access at Companies House), a Shareholders’ Agreement is a private contract that you can keep completely confidential.
During busy times when your business is thriving and demanding your full attention, talking to your solicitor about drafting a Shareholders’ Agreement may not be at the forefront of your mind. Nevertheless, taking the proactive step of documenting everything properly while everyone is in agreement is not only more efficient but also cost-effective. Waiting until a disagreement arises can be both time-consuming and expensive.
Tom would be pleased to discuss the options for your farming business, please get in touch with our corporate team, or contact us online.
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