Owning a business can be exciting - when things are going well and money is rolling in, it’s easy to think the good times will last forever. But life, like business, is full of the unexpected and it’s important to ensure you have basic safeguards in place.
Many New Zealand businesses are small and owned by a few shareholders. They also tend to be managers and directors of the business, as well as friends outside of work. In these situations, it’s easy for arguments to arise between shareholders which can be very damaging to personal relationships and the business’ bottom line. It’s imperative that while things are going well, shareholders plan for any potential problems which may arise in the course of business. A Shareholders’ Agreement is one mechanism to help overcome any hurdles.
What does a Shareholders’ Agreement typically cover?
While there are no set rules for what must be included in a Shareholders’ Agreement, a good agreement will usually cover:
Management and control of the company, including the right to appoint and remove directors;
- The right to vote and the matters that require unanimous or majority decisions;
- The process for entry and exit of shareholders;
- How and when dividends will be paid out to shareholders;
- Where the money to fund the business will come from; and
- What will happen if there is a dispute between shareholders.
Disputes and Deadlocks
Apart from establishing the processes for managing and operating the business, two crucial reasons for having a Shareholders’ Agreement in place are:
- To provide resolution when there are shareholder disputes. While shareholders might hope to always be able to reach an agreement with each other, disputes between shareholders are sadly all too common. If there is no Shareholders’ Agreement the process of resolving disputes can be messy, expensive and extremely distracting from the day-to-day operations of your business.
- Provide a process to resolve deadlocks. Deadlocks occur when shareholders holding equal voting rights are unable to agree, e.g. in a 50:50 situation. A “deadlock provision” will set out a mechanism by which deadlocks can be resolved and enable business to continue.
A Shareholders’ Agreement is often overlooked because legally a company constitution is all that is required. However, a Shareholders’ Agreement can prove invaluable down the track. While it may seem like an unnecessary cost now, the avoidance of pain later is worth the investment if things don’t quite go to plan.
If you would like to know more about Shareholders’ Agreements or how you can implement one for your Company, contact the Employment team at Godfreys Law on 03 366 7469.
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