Understanding someone as a ‘friend’ does not necessarily carry over when you try to make that friend your business partner. Yet, the stories we here of friends becoming business mates are not so uncommon.
When a group of friends or acquaintances come together to form a company, one of the most important documents get lost amidst the excitement and energy a new business brings. That document? The shareholders agreement.
It’s necessary for the shareholders involved to come up with rules that will govern them and the decisions they make along the way which can affect not only the company, but the partners in so far as how each other is treated in the business.
One of the key issues that a shareholders agreement must address is the issue of shareholder / ownership changes.
What happens when a shareholder leaves? It could be the remaining owner/s have the right to buy the departing owner out, or the departing shareholder can transfer the rights of ownership. This must be detailed in the shareholders agreement.
The decision making process of the company should also be clearly outlined so each owner understands their roles and responsibilities in the business.
One way to manage this is by having a board of directors. But you must first decide:
- How many directors there are, who are they and what are their core responsibilities?
- Can an employee shareholder be elected to the board?
- Is board representation meant to reflect the volume and spread of shareholding?
- Who is going to be the managing director or chairperson?
- Will the chairperson have a casting vote? What if you can’t agree?
- Should certain decisions require a higher level of approval than the typical ’50 percent plus one’ or the ‘majority’ rule?
- How can a director be removed? If so, when?
- What is someone isn’t doing their job or fair share?
- What if an owner becomes sick or passes away – who gets their share? The other owners, or their estate?
- What happens if someone wants to sell – how do you value your shares?
Having a shareholders agreement detailing these things will make the company much more stable and avoid confusion amongst its owners.
Other key issues that a shareholders agreement must address – money, profit, dividends and distributions.
You build a business to make money and as such, all the people who put their stake in your business would want that too. Think of the following question when drafting a shareholders agreement as these require an answer:
- How does the company intend to distribute dividends to the shareholders?
- How does management decide whether dividends are appropriate?
- How are new shares to be issued if more capital is required?
Having a robust shareholders agreement from the outset makes good business sense. It’s alarming how many stories we hear of mates going into business with no documentation, only for both the business and their relationship to sour.
The important thing to remember is that regardless of the size, a business will be in a better place by having a simple outline of fundamental rules before a conflict arises than waiting until you’re in the middle of one.
Having issues with fellow shareholders? Don’t hesitate to reach out to our business advisors for advice. Call us on (07) 5413 9300 today.