DON’T NEED A SHAREHOLDERS AGREEMENT

DON’T NEED A SHAREHOLDERS AGREEMENT? REALLY?
When clients form a company, or bring a new shareholder on board, we always advise them to put in place a shareholders agreement.
“Do it now while things are good” we say.
Sometimes the response is “How much will that cost?” Or even worse “We’ll be right. We’ve been friends for years. We trust each other.”
Nowadays thats when we say “That’s your choice, we’ll make a note that we’ve advised you to have one. We’ll also make a diary note to call you again in three years when things have turned sour.” And we mean it.
Why?
Because we’ve seen too many disputes between our erstwhile best friends who’ve found that business has strained their friendship. Sometimes to the point that they now can’t stand being in the same room together. If only they had taken our advice!
Having a shareholders agreement won’t mean you won’t have any disputes. But it will set out a framework for dealing with the flashpoints that typically cause problems within closely held companies.
So what sorts of things can you cover off in a shareholder’s agreement?
  1. How much can anyone spend without needing to get sign off from all the shareholders?
  2. How much is retained in the company and how much is paid out as dividends? Or does the company repay shareholder loans first?
  3. How much will you pay shareholder’s who also work in the business by way of shareholder salary?
  4. What area of responsibility will each shareholder have?
  5. What is the procedure if a shareholder wants to sell his/her shares and how are those shares valued?
  6. What happens if the company needs more money – does it borrow from the bank or do shareholders put more money in?
  7. If they do, is it by way of loan or is it capital?
  8. What happens if a shareholder doesn’t contribute funds when he/she is supposed to? Does his/her shareholding get watered down?
  9. Should that new shareholder who has just come onboard have to sell their shares back to you at cost within the first few years if he/she wants out?
“Aren’t those things covered by the constitution or the Companies Act?” I hear you say.
No. They are not. A lot of things are covered in the Act and can be included in the constitution. But not these.
We could tell you plenty of war stories of companies that have gone sour, but we won’t. Take it from us though when we say that a fight between two “former friends now shareholders” over a business dispute is on a par with marriage break up. Rational thinking seems to fly out the window, and its more about “sticking it to” the other. Not a good basis for sensible dispute resolution.
We can help. Putting an agreement in place at the start is best. Not only does it help resolve disputes, but it can also help defuse difficult situations so they don’t become full-blown disputes. Feel free to email us on russell@queenstownlaw.co.nz or phone 03-4500000.WeI look forward to saving you from yourself.