Agree how to disagree: the importance of having a shareholders agreement

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WHAT IS A SHAREHOLDERS AGREEMENT AND WHY DO I NEED ONE?

New Zealand regularly tops international tables for ease of doing business. Entrepreneurs going into a new business can easily set up a company and start trading – with equal shareholdings and directorships to reflect what they intend to contribute. 

However, in the excitement of getting up and running, owners sometimes forget to plan for tougher times or situations where everyone might not be on the same page – a global pandemic definitely ticks that box.  In times such as these, we see situations where business partners have different views on key decisions, such as whether to invest in a new piece of machinery, take on new partners, or simply how the business is operated. 

When decisions become difficult, having a shareholders agreement and robust company constitution prove their worth. A shareholders agreement is an optional document you can create when setting up a company, that creates contractual obligations between the shareholders. They are private, unlike a company constitution, and are particularly useful for companies with a relatively small number of shareholders, where the potential for deadlock and disagreement is greater.

No matter how well you know and trust your business partner, having clear terms for sorting out issues is an essential part of business ownership. However, you would be surprised how many business partners skipped that part or put it aside to sort out later.  In those situations, the Companies Act does contain some broad guidance for shareholder disputes.  However, it is not tailored to your business and (if the parties can’t agree) means heading to the High Court to resolve.

What is in a shareholders agreement?

A shareholders agreement can be tailored to suit the company’s needs. It may set out how company is structured, the day-to-day operations of the company, and how disputes will be managed. The agreement can be as simple or as detailed as the shareholders want. It could cover:

  • how you will operate the business and what the business will (and will not) do
  • governance and decision making
  • what roles / jobs each party will undertake
  • funding – bank / shareholders
  • bringing in investors as shareholders
  • selling your shares / exiting the business
  • restrictions on transfer
  • required transfer events – death, disability, default (tied in with insurance to cover where applicable), and
  • what to do if there is a dispute or deadlock in decision-making.

Agreeing these factors up front ensures everyone tied up in the business is on the same page, and helps prevent conflict or resolve it quickly in future.

If your business is no longer new, it’s still not too late to set up a shareholders agreement now and create some clarity.

Mechanisms for resolving disputes

Provisions can be put in place to resolve any deadlock between shareholders. This will be particularly important where no shareholder is able to control all or most decisions. Options for dealing with deadlock include (among others):

  • an escalation process that sets out how disputes will be managed, from negotiation through to mediation or expert determination
  • a put/call option where one shareholder can purchase the others’ shares in the event of a deadlock where a deadlock cannot be resolved, and
  • setting out criteria for when the business should be wound up or sold.

Without a shareholders agreement in place, the options available to resolve deadlocks and disputes involve uncertainty and can mean that the parties have to go to Court to resolve them, which can be significantly more expensive.

If you think your company may benefit from having a shareholders agreement, please contact our experienced business law team, who will be happy to talk you through the best arrangement for your business.  Alternatively, if you think a dispute may be brewing in your business, our dispute resolution team regularly assists with these situations (whether a shareholders’ agreement is in place or not).