In the excitement of setting up your own pharmacy business, certain items can be overlooked - sometimes this is for convenience, or, more often than not, it is in an attempt to minimise costs. That is perfectly understandable.
At the start of your journey as a pharmacy owner/operator, or when business is booming and things are running like clockwork, it is hard to imagine any of life’s negatives happening. However, it pays to be pragmatic in any business, including pharmacies, and you could view a shareholders’ agreement as the corporate equivalent of a pre-nuptial agreement – there just in case your business or personal lives take an unexpected turn. Too often we see pharmacy clients who have set up companies with friends or relatives and they don’t consider protecting their interests in that company until it is too late…
We regularly get asked by our pharmacy clients about the benefits of putting in place a shareholders’ agreement and whether it is really necessary – trust us when we say, it is, and if you are still not convinced, then read on...
What is a shareholders’ agreement?
Put simply, a shareholders’ agreement is a contract entered into by the shareholders of a company in order to regulate the relationship between the shareholders and govern the management of the company. It outlines the rights and obligations of each shareholder, which in turn provides protection for everyone from day one. The company itself can also be a party to the shareholders’ agreement.
Am I legally obliged to have a shareholders’ agreement?
No - there is no law requiring a shareholders’ agreement when incorporating a company at Companies House. All that you require to incorporate a company is a set of articles of association and, more often than not, people just choose to incorporate a company using the “model articles”. However, these are fairly basic and rarely deal with a number of situations which any given business, including pharmacy companies, may encounter.
So, what are the benefits of putting one in place?
There are so many benefits that it is impossible to cover them all in this note! However, some of the key points to consider are:
- Control over share transfers
Under the model articles, shares are generally freely transferrable. In such circumstances, a shareholder would be permitted to sell or transfer their shares in the company that owns the pharmacy to a completely unknown person, or even to a competitor if relationships have completely broken down. A shareholders’ agreement can, however, provide a mechanism to compel any shareholder who wishes to transfer/sell their shares, to first offer them to the remaining shareholders, or even to the company, before they can be transferred to a third party. This provides comfort to the other shareholders and gives them a degree of control over who holds shares in the company.
- Procedure on sale
What if a third party wants to buy your pharmacy company and makes you an offer you can’t refuse, but one or more of your co-shareholders does not want to sell? Well, if you only have model articles in place, then legally they don’t have to agree to sell – it is as simple as that! This can seriously hamper (or indeed thwart) any sale opportunities that may arise. However, a shareholders’ agreement can deal with what should happen in such a situation, perhaps a sale to a third party can be forced through, or alternatively the shareholder not willing to sell would have to buy out the other.
- Compulsory Transfers
Given the nature of pharmacy and the level of trust placed in pharmacies by their customers, you should consider whether there are any circumstances in which the behaviour of a shareholder should trigger an automatic obligation on them to transfer their shares, either back to the company itself or to the other shareholders. Some examples of this include where a shareholder has committed a criminal offence, or where a shareholder acts in a way that brings the company into disrepute or damages its reputation. Again, if you only have model articles in place, then there is no mechanism in place to remove a shareholder who mis-behaves.
A related point is what such a shareholder (often known as a “Bad Leaver”) is entitled to be paid for his shares on a transfer. A shareholders’ agreement could include a provision to say that a Bad Leaver, does not get full market value for their shares. Without this provision in place, there is nothing in the model articles to oblige a Bad Leaver to sell at a reduced rate.
- Restrictive Covenants
Put simply, a restrictive covenant helps to ensure that shareholders, both for the duration that they are a shareholder and for a set period of time after they sell or transfer their shares in the company, are prevented from doing certain things that could be in competition with, or commercially damaging to, the company. Pharmacies are generally extremely valuable businesses and you should do all you can to protect and preserve that. Again, the model articles do not contain any restrictions on shareholders.
- Disputes
Despite everyone’s best efforts, the day to day running of a company can be stressful and can sometimes lead to tensions arising between shareholders and directors. Disputes, if allowed to run on indefinitely, can be time consuming and costly for the company. A well drafted shareholders’ agreement provides a framework and procedure for dispute resolution, by outlining how certain decisions are to be made, by whom and by when. This prevents shareholders relying on draconian measures as a way to settle disputes and can ensure that any disputes are dealt with as efficiently as possible.
The above are only a handful of the reasons why it is vital to put in place a shareholders’ agreement in order to fully protect your interest in your pharmacy business. They are a fairly inexpensive solution to a lot of issues that could potentially have a negative impact on your pharmacy business in future and could save you both time, money and effort in the long run.
The Thorntons Pharmacy Team have helped many of our pharmacy clients over the years to put in place effective and practical shareholders’ agreements tailored to the requirements of their particular business. We have first hand experience of the types of issues that commonly arise and can offer a variety of pragmatic solutions to these. If you have any questions or need advice please contact the Pharmacy Team on 03330 430350.
