Businesses are dynamic and rapidly change. Entering into business with someone else is inherent with risk but there are some important steps to take to minimise any future confusion and frustration. All businesses that involve two or more shareholders should consider a Shareholders Agreement.
Shareholders Agreements are put in place early in the establishment of a business and provide clear rules of engagement between business shareholders. A well developed Shareholders Agreement is just like an insurance policy, if you don’t have one in place when you need it then it is probably too late. A small initial investment in drafting and executing a tailored Shareholders Agreement for your business could save you significant investment in the future because without one it can be an expensive legal exercise if partners have differences of opinions.
We have invited Hannelie Opperman of Opperman’s Lawyers to discuss below why a Shareholders Agreement it important for small business.
The Importance of Shareholder Agreements and Partnership Agreements for a Business
You don’t want to rely on luck when you are starting a new business venture, but that is exactly what a lot of people do when they fail to make plans to prevent potential problems, problems such as disputes between the ‘stakeholders’ (shareholders in a private company, unit holders in a trust or partners in a joint venture) which are very common.
These problems can be avoided or at least contained and the damage minimised, if the right steps are taken at the start of a business and when the stakeholders come together and decide to embark on the business. But often flushed with optimism and the enthusiasm of a new venture with promising partners, most people don’t think about what may go wrong. The “It won’t happen to me” syndrome is alive and well.
As a result, only those who understand how critically important it is to have a shareholder agreement or partnership agreement (perhaps because they have had their fingers burnt in a joint business venture before) end up being adequately “insured”.
When people go into business together, they are confident that they can work together harmoniously on an ongoing basis, whether they are working in the business itself or only as directors. Also, most people assume that their best interests are aligned with the best interests of the other shareholders because they have a common objective of making the business successful. Whatever the situation in the beginning, things can always change, particularly if the business does not live up to expectations. Even in successful businesses, the interests and objectives of the shareholders can change for other reasons such as personal financial issues, or family problems, which can mean one of the shareholders needs to sell his/her shares.
The following are just some of problems that are experienced between stakeholders and should be addressed in a well drafted shareholders agreement or partnership agreement to minimise risks:
• Misunderstanding about exactly what each person is required to do.
• The “What ifs” in the beginning.
• Different expectations of different shareholders.
• Excessive remuneration paid to executives who are shareholders and as a result, profits available to the other shareholders are reduced.
• Limited access to information about the company’s affairs.
• Minority shareholders end up with their shareholding being diluted.
• Minority shareholders get ‘locked in’ indefinitely without an exit opportunity.
• Minority shareholders have no involvement in important decisions.
• The majority manage the company poorly.
• The minority have no power to change the management.
• Some of the shareholders getting involved in a competing business.
• Deadlocks occurring without any deadlock breaking clause.
Despite the importance of a written agreement in preventing the above problems, the best form of prevention still remain to go into business only with people of integrity that you can trust. But even then, problems still occur so think twice before you go into business with a close friend or family member. If you do, it is even more important to protect your relationship with a stakeholders’ agreement.
If you have any queries in relation to the above, or would like to discuss these types of documents and arrangements, please contact Hannelie Opperman on 9394 6305 or at hannelie@oppermans.com.au
Opperman Lawyers is a legal practice, specialising in commercial and property law. We understand our client’s objectives and provide clear and independent advice. Service is paramount to us. We deliver technically sound, timely and commercially oriented solutions. We work with our clients. We listen to our clients. We are approachable, accessible and personable.
