Property development is often built on relationships – it is by its very nature a people business. Many successful developments begin with friends, family members or investors coming together to pursue an opportunity. In the early stages, when relationships are strong and everyone shares the same vision and enthusiasm, it can be easy to assume that trust, a handshake and mutual understanding are all that is needed. However, as the business grows, important decisions will need to be made on a regular basis. Should the company acquire a new site? Take out a new loan? Bring in a new investor?
Many assume the answers to these questions are obvious. However, disagreements often arise when shareholders have different priorities, risk appetites or financial objectives. What appears to be the obvious course of action for one shareholder may be viewed very differently by another.
Without a shareholders’ agreement in place, these situations are governed largely by the company’s articles of association and general company law, which may not reflect what the shareholders actually intended when they went into business together.
A well drafted shareholders’ agreement provides clarity and certainty. It clearly identifies which decisions require unanimous approval and which can be made by a majority. By agreeing these rules from the outset, shareholders can reduce the risk of disputes and make sure that important decisions receive the appropriate level of oversight.
What happens when shareholders cannot agree?
Even the strongest relationships can face disagreements.
In property development, delays in decision-making can lead to missed opportunities, increased costs and strained commercial relationships. A stalled development can very quickly become an expensive problem.
A shareholders’ agreement can include a clear deadlock resolution procedure so there is a mechanism in place to resolve disputes before they impact the business.
Planning for the exit
It is assumed that shareholders rarely enter a business expecting to leave but that is not always the case. A shareholder may want to be involved for a project or two, investors may need liquidity, and shareholders may simply have different views about the future direction of the company. Circumstances can also change.
Without appropriate protections, a shareholder wishing to exit could struggle to sell their shares, whilst the remaining shareholders may suddenly find themselves in business with an unknown third party.
A shareholders’ agreement can address these concerns through provisions such as restrictions on share transfers, pre-emption rights or rights of first refusal and compulsory transfer provisions in certain circumstances.
These clauses help provide certainty and avoid disputes when ownership changes.
Managing expectations around profits and dividends
Property development businesses often generate profits irregularly. Cash may need to be retained to finance future acquisitions, support ongoing developments or service borrowing.
As a result, disagreements frequently arise where one shareholder wishes to extract profits while another prefers to reinvest them into the business.
A shareholders’ agreement can help manage expectations by setting out a clear framework for dividend payments and profit distribution. Establishing these principles at the outset can help prevent significant tensions later on and keep shareholders aligned on the company’s financial strategy.
A tool for long term success
A shareholders’ agreement is not just a document for resolving disputes. It is a tool for protecting value, preserving relationships and providing certainty as the business grows.
In the property development business, where projects are often long term and capital intensive, clear rules governing shareholder rights and obligations are essential. Investing time in agreeing the rules at the outset is generally far less costly than attempting to resolve a dispute after tensions have developed.
At Nockolds Solicitors, we regularly advise property developers, investors and business owners on shareholders’ agreements tailored to their specific commercial objectives. Whether you are establishing a new venture, bringing in investors or reviewing your existing arrangements, our corporate team would be happy to assist with preparing or reviewing a shareholders’ agreement that works for your business.