The Will for Your Business – Do you Need One?
By Jack Newton, Law Graduate, MST Lawyers
When people come together to develop a business they normally have roughly the same aspirations and goals. In the early years they work together effectively to achieve the common business goal.
Sometimes a new person joins an existing business and all the parties hope they have the same aspirations and goals.
Unfortunately like marriage disputes, shareholder disagreements are quite common.
Today, circumstances can change extremely quickly, and often in those circumstances a business and its shareholders need a process of managing the changes in circumstances. The question is – how do they know what process to follow?
Some of the types of factors that may impact your business are:
- financial difficulties;
- attitudes to risk;
- family responsibilities;
- health and age;
- definition of success; and
- perception of unequal contribution of shareholders.
Our advice to businesses is that they should get a shareholders agreement done whilst everyone has the same general view as to how the business should be run and developed.
We often get the response that the shareholders agreement can be done later on when things are going well and there are funds available and time to adequately prepare a shareholders agreement.
In these circumstances, it may be best to prepare a relatively simple shareholders agreement. This way, the basics would be covered and would provide security to then negotiate a more complex shareholders agreement down the track.
Another reason to have a shareholders agreement done is simply the cost associated with any litigation. The two elements of the costs are:
- legal costs of a dispute; and
- business opportunity costs.
Serious shareholder disputes can disrupt a business so much that there is nothing left to argue over.
Imagine how distracting it would be if you and your fellow shareholders were in a bitter dispute about further contributions of capital to expand your business. Imagine you had just started a family or were looking to retire when your other shareholders come to you and ask for a further capital contribution of $100,000. What would you do? How much money would be lost by your business if all the shareholders were distracted by this dispute?
If you had a shareholders agreement, those types of scenarios could be avoided.
A shareholder agreement will typically contain clauses covering off on the following:
- Capital Contributions
- Consequences for non-contributing shareholder
- Transfer of shares
- How should you deal with a transfer of shares?
- Other shareholders obliged to offer their shares to the existing shareholders?
- What happens if they don’t want to buy?
- Death or Disablement of a Shareholder
- Shareholding taken over by the family?
- Buy-back by other shareholders?
- Who and how many?
- Who should be a chairperson and how many directors are required for quorum?
- Are there any shareholder loans to the company?
- Who decides whether the business is to borrow to expand?
- What salaries will the shareholders/directors be paid?
- Sale to third parties
- Who decides if a business is going to be sold to an independent third party?
We strongly suggest to all businesses that they put in place a basic shareholders agreement.
Some businesses may find that a basic shareholders agreement will not cover their needs. In that scenario, an appropriately tailored shareholders agreement will ensure that the shareholders rights and obligations are documented and protected.