You should always protect your investments as best you can and your entry into a new business venture is no different.
Any new business always starts with good intentions and hope for a positive outcome. However, no matter how strong the bond between you and your business partner(s), every relationship goes through its ups and downs and you should try to agree on the fundamentals of your current and ongoing business relationship, in case the relationship breaks down.
Types of Agreement
These can come in any number of forms such as a Shareholders’ Agreement (for limited liability companies), a Partnership Agreement or a Joint Venture Agreement.
Given that most businesses operate as limited liability companies, Shareholders’ Agreements are most commonly seen. We will therefore, for ease, focus on these – albeit that the matters that can or should be covered in a Shareholders’ Agreement are relevant to other forms of Co-Ownership Agreements.
What is a Shareholders’ Agreement?
Ultimately it is a private agreement between the shareholders as to how they will run the company although it is a very flexible document and can be used to cover any matters that the shareholders wish.
Without a Shareholders’ Agreement, the shareholders might not have a say over company matters if the directors (and company itself) are complying with the Companies Act and the Company’s Constitution (if it has one).
As mentioned above a key aspect of a Shareholders’ Agreement is that it is a private document, between the Shareholders and the Company, and not available to be viewed by others, unlike the Company’s Constitution, which is a public document and registered on the Companies Office website.
While it is preferable for a Shareholders’ Agreement to be signed on or before the incorporation of a company it can be entered into at any time.
Why should you have a Shareholders’ Agreement
Some benefits of having a Shareholder’s Agreement include:
• dealing with matters decided prior to incorporation unlike the constitution, which will only take effect from date of incorporation;
• removing misconceptions as to the scope and purpose of the business;
• detailing provisions which require unanimity to be altered – a constitution can be changed by 75% of the shareholders and therefore could be changed without the agreement of a minority shareholder.
What should be included in the Shareholders’ Agreement?
A Shareholders’ Agreement is flexible and can include anything that the Shareholders consider relevant. There are common topics, which we would recommend are considered for inclusion, as follows:
1. The purpose of the business and how it will be run by the shareholders;
2. The number of directors and who has the right to appoint or remove them;
3. The roles and responsibilities of the shareholders;
4. What decisions require shareholder approval (and the level of said approval e.g. unanimous);
5. How funding will be arranged and secured (including shareholder loans);
6. How shares can be transferred or sold – e.g. pre-emptive rights;
7. How shares are to be valued and if the valuation alters depending on the circumstances;
8. How and under what circumstances can a shareholder or director be removed;
9. Restraint of trade and non-competition provisions
10. Dividend policy;
11. Dispute Resolution and Deadlock provisions – i.e. what happens when shareholders cannot agree or a dispute cannot be resolved.
Areas of common contention relate to how a shareholder can exit the company and resolving disputes.
We would recommend that focus be given to this issue as it is important for a shareholder to understand (prior to entering the company) when and how they may be able to exit the company and on what terms.
By way of an example an agreement can outline a minimum amount of time that a shareholder must remain part of the company and the exit process itself (e.g. notice requirements and share valuations).
Disputes and deadlocks
While shareholders might hope to always be able to reach an agreement with each other, disputes are common. If there is no Shareholders’ Agreement the process of resolving such disputes can be messy, expensive and extremely disruptive to the day-to-day operation of the company.
Deadlocks occur when shareholders holding equal voting rights are unable to agree. In such circumstances it is important to set out how such a deadlock will be resolved to ensure that the company can quickly move forward.
Negotiation of agreement
The act of negotiating a Shareholders’ Agreement (or other form of co-ownership agreement) is an important and useful process to undertake with your prospective shareholders/business partners as you will need to discuss and try to agree on what will happen if a certain event arises.
This will assist in the process of getting to know each other and ultimately will help establish that you can actually work together.