Traditionally farms have been operated as sole proprietorships or general partnerships. The advantage of these types of unincorporated business are that they have low administrative costs and few legal or regulatory formalities that must be complied with – although partners of a general partnership ought to enter into a partnership agreement (a topic for another day!).

However, the owners of unincorporated businesses run the gauntlet of unlimited liability meaning they are personally liable for the debts and liabilities of the business. As a result, farm owners are increasingly recognising the advantages of operating their business through a company where, except in exceptional circumstances, their personal liability is limited to the nominal amount they must pay for their shares in the company.

Company incorporation is often accompanied by an issue or transfer of shares to family members to recognise their involvement in the family business or as part of a farm owner’s succession planning. However, the importance of creating a shareholders’ agreement as part of this process is sometimes overlooked.

What is a shareholders’ agreement?

On incorporation a company will adopt ‘articles of association’ to deal with the administrative structure of the company and its basic management. A shareholders’ agreement is distinct from the articles and creates a contract between a company’s shareholders. It will cover a much wider range of issues than the articles and can deal with specific issues unique to farming and family run businesses. In contrast to the articles, the shareholders’ agreement will not be publicly available at Companies House.

What are the benefits of a shareholders’ agreement?

Issuing or transferring shares to family members (or others) can mean relinquishing a degree of control over the farming business. A shareholders’ agreement can help farm owners address this issue by ensuring their approval is required for critical decisions related to the farm (so called reserved matters). If desired, other shareholders/family members can also be given a say on certain decisions.

A concern for any family run company is that shares may end up being held by someone who does not meet with the other shareholders’ approval. The agreement can create control over who may hold shares in the company by placing restrictions on the transfer of shares and stipulating what happens if certain trigger events arise (e.g. the death or incapacity of a shareholder).

Further, while family disputes are an uncomfortable thought, they are not uncommon. It is important that any issues are anticipated and can be resolved by reference to a well drafted agreement.

What else can be included in a shareholders’ agreement?

The short answer to this question is anything. There is no limit on the type of issues that can be dealt with, but we do recommend they are limited to company matters. An exhaustive list is outside the scope of this article but common provisions include:

  • Management and running of the company: this will cover the method of appointing and removing directors, approval of any capital expenditure, and other financial issues. It is important that each shareholder has a clear understanding of how they should be contributing to the business and what rights to expect in return.
  • Payment of dividends: this will ensure each shareholder understands the basis on which dividends will be declared and paid. It is common for shareholders to hold different classes of ordinary shares so dividends can be paid to some shareholders but not others. This provides flexibility over how profits can be allocated between family members.
  • Deadlock: this will provide for resolving disputes between shareholders when they all expect a say in how the farm is operated. The deadlock provisions may refer the dispute to a mediator or an expert for determination or result in some shareholders being able to buy out the others so they can go their separate ways without necessarily winding up the farming business.

Shareholders’ agreements do require some careful thought and tailoring to the requirements of a particular farming business. However, the advantages of providing stability and protecting family members’ interests in the farm should definitely outweigh the time and effort involved in having one prepared.