Good shareholder relationships are important. According to the Romans, community of property or co-ownership was the mother of all disputes. And this still holds true today. How often does the following scenario play out?
Shareholder Relationships can go Wrong
Two or more people decide to start a business together. The reasons and people are diverse. One has a network, the other the idea and expertise. They decide to go into business together and form a company. Each person assumes that other person has similar values and ideas. As often happens, things start going wrong – a customer does not pay or pays late, the warehouse is broken into and the stock stolen, or one of the shareholders die. The company needs money and the shareholders need to lend more money to the company. Some people pay and others don’t. Calls aren’t returned, messages are left and sent, and before they know it – they hate each other.
What now? It’s a mess because they can’t work together to run the company and they also can’t separate easily. One wants out but the other is only willing to pay half the market value to buy the others shares. It may also be hard to sell the shares or the business to a third party.
Every Company should have a Shareholders Agreement
This is why a shareholders agreement is essential. This is in addition to having a correctly drafted memorandum of incorporation. Conclude it at the beginning of the relationship before there is any “baggage“. It should deal with things like:
- Who will be directors?
- When will shareholders and directors meet?
- How will decisions be made?
- What happens if a shareholder fails to make a loan to the company?
- What happens if a financial institution does not accept a shareholders surety?
- Does a shareholder have recourse against the others if a financial institution enforces a surety against one shareholder for the full debt?
- How and for how much does a shareholder sell their equity if they voluntarily wish to sell?
- When and how can a shareholder be forced to sell their equity?
- Can a minority shareholder block the sale of the equity of the company?
All of these things need to be clearly set out and agreed in advance.
Do not get caught without a shareholders agreement! Otherwise, you may find your only option is to go to a bar (not a legal one) and get “motherless“.
We offer a workshop to help you get to grips with managing the relationship between shareholders.