Peace and harmony in business: making a shared business work.
As a business owner, it can be a point of pride to watch your dreams translate into equitable profits. However, the road to success has many potholes to avoid and expressways to take — if you recognize them in time.
Starting a new business, or buying into an existing one, is always an exciting time. All that positivity and enthusiasm! What could possibly go wrong? Right?
Everything new has an element of the unknown, that’s what makes it so thrilling. But with every business venture comes an element of risk, especially where there are shareholders involved.
Prevention is better than cure
However amicable things are in the beginning, the sad reality is that people often have differing opinions and can end up falling out. All business owners – including those in family businesses – can benefit from a shareholders’ agreement.
So what is a shareholders’ agreement?
A shareholders’ agreement is a private agreement between the shareholders of a company setting out key rights and obligations, with a process for resolving disputes. Unlike the documents of incorporation, a shareholders’ agreement is not filed at the Companies Office and nobody, apart from the parties involved, needs to know that it exists. It will maximise the probability of maintaining both personal and business harmony and prosperity through the triumphs and trials of running a business.
The nature of the close relationship of family or friends that go into business together often results in a ready consensus on terms, and thus is a relatively inexpensive investment to make an agreement early on. And reaching an agreement early and revising it periodically as circumstances change minimises discord by guiding ownership, decision-making, conflict resolution, and importantly, the distribution of money. Without adequate planning and protection in place, disputes can have a significant and potentially costly impact on the shareholders and for the whole business.
Do I need a shareholders’ agreement?
A shareholders’ agreement is useful for any company with more than one shareholder, especially if they don’t all have equal power. If the shape of your business involves more than one owner, here are some things you need to consider…
If a shareholder wants to leave the business, how are their shares valued? Can the other shareholders insist on buying the shares before they are offered to others? What happens to a shareholder’s shares if that shareholder dies?
What is the dividend policy? Is there a policy for reinvesting profits into the company?
Are shareholders able to veto the issue of new shares to prevent their shareholding from being diluted?
How will the business deal with a dispute or deadlock situations between shareholders?
Can a shareholder be forced to sell their shares to the other shareholders? What would the valuation procedure be in that case?
Should shareholders set measures in place to prevent a key shareholder from leaving the business to set up in competition or poaching customers/staff?
Do shareholders want the right to appoint directors of their choosing to ensure their views are taken into account by the board?
Will all shareholders have equal power e.g. when can minority shareholders veto decisions?