Is an unsigned shareholder agreement still vaild?

[CastleBoy]

Hello all

As my post’s title says, I am seeking for some legal advice regarding a shareholder agreement which has been drafted up and amended several times but never signed by any directors. Please tell me if this unsigned shareholder agreement is still valid or not?

A very brief explanation of my case here.

I setup a business with 3 other people some years ago. None of us had any experience of running a business, I know it is not an excuse for what has happened within our business. We drafted up a basic shareholder agreement but it has never been signed by any directors. The reason for that is because two directors could not agree with what each other included in the agreement. The agreement was left alone then even the company’s accountant has reminded us to sign it every year.

The business has been doing well over the years but the relationship between the directors was getting worse and worse every year (due to abuse of power, greed and dishonesty). One director (director A) had enough and resigned over a year ago. He was keen to sell his shares back to the company and move on but the rest of us were given some bad advice from the company’s accountant, so the shares have never been bought back to the business and now director A takes legal action against the remaining directors.

Cut the very long story short, there have been some ‘appalling discussions’ between the remaining directors about how to deal with director A’s dispute, I did not agree to what the other directors planned to do, so I decided to leave too.

Just like director A, I am keen to sell my shares back to the business and move on. But the negotiation did not go very well at all, once again just like director A’s case.

I did some research on internet and discovered a lot of advisors talking about a shareholder agreement. It seems to me there may be a way to settle the dispute between all directors here by using a shareholder agreement, but as I said at the beginning, our shareholder agreement has never been signed. So before I dismiss the idea of using our shareholder agreement to settle the dispute, I would like to know if an unsigned shareholder agreement is still valid to us or not please.

 

[Ian J]

A verbal contract is as binding as a written one but seeing as the four directors never even agreed the wording of the contract verbally I can't see it having any validity at all

 

[Chris Ashdown]

There is no obligation for the company or remaining shareholders to buy your shares. you can offer them or to the company, anyone else at any price you wish, but few would buy into a company they cannot control i.e. have a total of 51% of the shares

With the shares you do have some options have a search of "powers of shareholders "

If they ever issue dividends then you ere entitled to your share of them, and although they can issue more shares, they must offer you the choice of buying enough of the new shares so that you keep the same % of total shares issued

depending on your share holding you might be able to buy director A's shares and would that take you over the 50% and enable you to get back on the bord and dispose of the remaining director

For many serious decisions the remaining shareholder would need to have 75% of the votes to say close down the company or sell the company

 

[Mr D]

Can be enough of a nuisance that the other shareholders really, really want to buy your shares.

Or just relax and wait for dividends. You don't have to sell shares.

 

[CastleBoy]

There is no obligation for the company or remaining shareholders to buy your shares. you can offer them or to the company, anyone else at any price you wish, but few would buy into a company they cannot control i.e. have a total of 51% of the shares.

Totally understand that I can’t force the company to buy my shares, equally the company can’t force me to sell my shares. But what I cannot understand is, as I said earlier the business is going well, so seeing I will not contribute any future growth to the business, I would expect the remaining directors see this as a good opportunity to buy me out then they can keep the profit share themselves without giving me a penny in the future. I can only see what they are doing now (not interested in buying my shares and director A’s shares) is a bad advice that given by the company’s accountant.

 

[John Hemming]

Its a negotiation in the end as to the price and when the money is paid. You don't seem to actually have a shareholders agreement, but technically you would have to look in detail as what was said about it and whether it is arguable there is some form of agreement. It is, however, unlikely to be worth spending a lot of money on depending upon how valuable the company might just be.

 

[CastleBoy]

just relax and wait for dividends. You don't have to sell shares.

It would be nice if that ever happens. The remaining directors have already worked on some dodgy plans to stop director A and me to receive dividends.

 

[Mr D]

It would be nice if that ever happens. The remaining directors have already worked on some dodgy plans to stop director A and me to receive dividends.

Which is why you should ask for audit every year. And take legal advice as needed.

 

[CastleBoy]

Which is why you should ask for audit every year. And take legal advice as needed.

I will certainly put the audit request in every year if they are not buying my shares now at the fair price.

And what if they ignore my audit request, can I report them or something?

 

[CastleBoy]

Its a negotiation in the end as to the price and when the money is paid. You don't seem to actually have a shareholders agreement, but technically you would have to look in detail as what was said about it and whether it is arguable there is some form of agreement. It is, however, unlikely to be worth spending a lot of money on depending upon how valuable the company might just be.

The other party keep on making silly offers which I will certainly not accept. As far as I know, between the directors, we did not really come up with any form of agreement in terms of the shares. I even looked at the draft shareholder agreement now, it gives no option of what happens when a shareholder leaves the business. Thinking about it now, even the shareholder agreement did get signed in the first place, it doesn't really help resolve the current situation in my opinion.

 

[CastleBoy]

Can be enough of a nuisance that the other shareholders really, really want to buy your shares.

In terms of being a nuisance, what else can I do apart from asking for an audit every year?

 

[Chris Ashdown]

What are the percentage of each persons shares

 

[John Hemming]

The other party keep on making silly offers which I will certainly not accept.

You probably have the practical choice of either
a) accepting a "silly offer"
b) being a nuisance but getting no cash.

 

[KAC]

In terms of being a nuisance, what else can I do apart from asking for an audit every year?

Sadly it is the directors who instruct the accountants/auditors and who pay their fees.

Failure to comply with a request for an audit would be a civil matter and the legal fees to institute proceedings against the directors would be substantial as are all commercial legal matters So far as I am aware. Companies House won't be interested as it would be a "voluntary" audit.

Audits are not in any case forensic examinations of the financial records. Any audit would only be engaged with amounts that are "material". For Tesco plc, the materiality level was £50M. See the bottom of the first column.

 

[CastleBoy]

You probably have the practical choice of either
a) accepting a "silly offer"
b) being a nuisance but getting no cash.

Is it how it works when running a business in reality? When one party disagrees with another party, the first party boots the second party out and makes him/her get nothing from the business.

 

[CastleBoy]

Failure to comply with a request for an audit would be a civil matter and the legal fees to institute proceedings against the directors would be substantial as are all commercial legal matters So far as I am aware. Companies House won't be interested as it would be a "voluntary" audit.

In other words, dodgy directors can do whatever they fancy to other directors and shareholders in the business, right? The other directors and shareholders cannot afford to proceed the legal matters and there is nowhere else they can turn to for help.

 

[Chris Ashdown]

Unfortunately there is no such thing as cheap justice, and nobody to enforce the laws apart from yourself taking them to court

This forum is filled with stories of Directors who did not understand their duties and naive people starting companies without considering the worst case scenarios and making a shareholders agreement prior to making the company operational

Enthusiasm is a killer of many companies, in that you never consider failure

 

[Mr D]

Is it how it works when running a business in reality? When one party disagrees with another party, the first party boots the second party out and makes him/her get nothing from the business.

If they have the power, yes.
Why they have that power is open to question - hence shareholder agreements are handy to agree.

 

[Mr D]

In other words, dodgy directors can do whatever they fancy to other directors and shareholders in the business, right? The other directors and shareholders cannot afford to proceed the legal matters and there is nowhere else they can turn to for help.

Civil dispute, they can turn to the courts.
Not being able to afford that? Compared to being able to afford doing nothing and keeping things as they are now?

 

[CastleBoy]

Unfortunately there is no such thing as cheap justice, and nobody to enforce the laws apart from yourself taking them to court

This forum is filled with stories of Directors who did not understand their duties and naive people starting companies without considering the worst case scenarios and making a shareholders agreement prior to making the company operational

Enthusiasm is a killer of many companies, in that you never consider failure

I cannot agree more and I never think justice is cheap. My legal fees have already costed me as much as my whole year's salary, but still I haven't gone very far with my case. I am legally advised that I will need to have as much as 5-6 times of my year's salary before I can take my case to court.

 

[Chris Ashdown]

What is the shareholder breakdown in percentages and whats the turnover of the company
i.e. what are we talking about

 

[CastleBoy]

What is the shareholder breakdown in percentages and whats the turnover of the company
i.e. what are we talking about

Please check your inbox.

 

[The Resolver]

Whilst the whole Shareholders Agreement could not be enforced if not signed by anyone, should there be evidence (eg by emails) of an agreement by all shareholders for a share buy back process should any shareholder resign from the Board and you resigned in anticipation of such a process, then this my possibly be capable of enforcement. However this is likely to be a long shot. It may however be worthwhile checking the Articles of Association.

I specialise in helping shareholders reach agreement without court proceedings. As has been said above the key is for the minority shareholder to conduct himself in a way that is a bit of a nuisance keeping the directors under a microscope, raising questions on record, requiring meetings to be called, demanding audits , and making it clear to the others that it is going to be in their interests in the long term to buy you out now when value is lower than it will be in future (given you feel the business is doing well). They also need to realise that without a "Drag Along" clause in a Shareholders Agreement they may not be able to sell the company in future without your agreement. You should be displaying your knowledge of the detail of company law whilst suggesting, even though it is not strictly true right now, that you prefer to hold onto the shares and benefit from their success. The right approach should encourage them into realistic negotiations.

You are welcome to give me a call for a free 20mn advice chat - 07885 728801

 

[Millerd]

Google "rights of minority shareholders" (the one from Myerson Solicitors is current)- there are various options that may be applicable.

 

[CastleBoy]

I see many solicitor companies or legal advisors have suggested court proceedings, but do these people realise how much money it requires to take a guilty party to court? It makes me think those who run a 'dodgy' business are encouraged by the system in my opinion – people cannot afford to take the baddies to court but have nowhere else to turn to...

 

[Mr D]

I see many solicitor companies or legal advisors have suggested court proceedings, but do these people realise how much money it requires to take a guilty party to court? It makes me think those who run a 'dodgy' business are encouraged by the system in my opinion – people cannot afford to take the baddies to court but have nowhere else to turn to...

Then it comes down to choice.
If they won't listen to negotiation and won't take action themselves to resolve the matter that leaves the ball in your court.

What action do you want to do?

 

[CastleBoy]

What action do you want to do?

I want legal action but I don't have that large amount of money to make it happen, so basically it is not about what I want to do but what I can afford to do.

 

[Mr D]

I want legal action but I don't have that large amount of money to make it happen, so basically it is not about what I want to do but what I can afford to do.

Then do not expect anything to happen.

Perhaps after a few more get treated the same way you can afford action between you.
The directors appear to have no incentive to change.

 

[CastleBoy]

Or become a shareholder from hell. It’s a shame that when I googled that, nothing came up...

 

[Chris Ashdown]

Stand back for a year and just be a pain in the arse, see how the company is after a year and if they have had good sales and the shareholder funds have grown on the balance sheet, send them a letter thanking them for increasing your share value by £xxxx, keep asking for the audit and attend every shareholders meetings etc

Use every opportunity to thank them for working for you

Make sure every meeting is properly minuted and a copy given to you

 

[CastleBoy]

Stand back for a year and just be a pain in the arse, see how the company is after a year and if they have had good sales and the shareholder funds have grown on the balance sheet, send them a letter thanking them for increasing your share value by £xxxx, keep asking for the audit and attend every shareholders meetings etc

Use every opportunity to thank them for working for you

Make sure every meeting is properly minuted and a copy given to you

I like your style!