Closely-Held Companies – The Importance of a Co-ownership Agreement

What is a closely-held company?

At Wakefields we specialise in dealing with smaller companies known as closely-held companies, or so-called ‘mum and dad’ type companies.

These companies usually have between two and six shareholders. The shareholders are typically family members, close friends or business associates. In that regard the shareholders have taken a pre-existing personal relationship and formed a professional one. That is why it is very important to agree from the outset the terms of that professional relationship by entering into a Co-ownership Agreement. This helps to prevent misunderstandings which can lead to costly disputes and the ultimate breakdown of both forms of relationship.

What is a Co-ownership Agreement?

A Co-ownership Agreement sets out the terms between the shareholders and includes at a minimum:

• Who the shareholders are, what types of shares they hold and how many.
• The extent of control in decision-making, and the roles and responsibilities of each shareholder.
• Restrictions on the ability of a shareholder to sell their shares to third parties without first offering those shares to the other shareholders.
• Restrictions on shareholders engaging in business in competition with the company whilst they are a shareholder and afterwards.
• Dispute resolution processes  to ensure that shareholder disputes are dealt with quickly and effectively to minimise damage to the relationship and potential costs.
• Exit arrangements setting out when a shareholder leaves and the process for buying out a shareholder.

Another advantage of a Co-ownership Agreement is that it is private and confidential, as opposed to a company constitution which is registered at the Companies Office and consequently is a public document. It can therefore deal with sensitive matters that the shareholders wish to keep confidential from other family members, friends or business associates.

The best time to enter into a Co-ownership Agreement is at the very outset of the business relationship but they can be entered into at any time during the life of the company. At Wakefields, we support a wide range of closely-held companies to put in place Co-ownership Agreements to ensure that the shareholders have considered and formed a consensus on all critical matters to their business. If you are involved in, or thinking of, setting up a closely-held company, come and talk to one of our specialists. We offer an initial free consultation and, if you decide to proceed, the cost certainty of a fixed fee estimate.