Managing Relationships in a Business

Sometimes, issues can arise which put pressure on the business owners and which are outside their control.

We often meet with shareholders who are in dispute, despite having begun their business venture as close friends or family members. Resolving a dispute between shareholders/unitholders can be expensive and time consuming.

This can often be prevented by having a Shareholders Agreement (for companies) or Unitholders Agreement (for unit trusts). These agreements set out, on a contractual basis, the terms for the relationship between the owners and operate in addition to the Company Constitution or Trust Deed. Such agreements provide the owners with the opportunity to record their agreed rights, powers, obligations and general terms for how they intend to manage their relationship, the entity and the business.

A comprehensive agreement will usually contain provisions dealing with the following matters:

• the purpose of the entity and its permitted business interests
• policy for distribution of profits
• directorships and representation of the owners on the board of the Company
• decision making, including matters which require the unanimous approval of the owners (e.g. obtaining loan finance, entering into significant contracts and expenditure, entering into litigation, decisions regarding employees and other personnel)
• what is to happen on the voluntary exit of an owner, including a right of first refusal to the continuing owners
• what is to happen on the death or total and permanent disability of an owner, including payment methods for a buy-out of their interest by the continuing owners (and, usually, a funding mechanism by means of each owner having appropriate insurance policies)
• drag-along/tag-along rights in the event of a third party desiring to acquire the entity
• valuation processes in the event of a dispute about fair market value of an owner’s interest in the business
• consequences of a breach of the agreement and other events of default (e.g. insolvency or criminal acts)
• process for resolving ‘deadlocks’ by triggering a compulsory buy/sell
• confidentiality and intellectual property rights
• reasonable restraints against competition and solicitation of customers, suppliers and employees
• dispute resolution process.

Where the ownership interests are equal, it would be usual for the agreement to be fair “all round”, with equal rights, powers and obligations. However, where there are unequal ownership interests, more care may need to be taken. A common example of this arises where there is a founding owner who is admitting new owners into the business, while maintaining a larger ownership interest. For example, some types of decisions may require their approval rather than a simple majority approval and they may have a right of first refusal to acquire the interest of an exiting party.

Each business is unique, so proper care should be taken to tailor an Agreement to the circumstances.

Contact

Mitchell Zadow, Managing Principal, Accredited Specialist (Commercial Law)

If you would like to discuss how a Shareholders Agreement or Unitholders Agreement could benefit your business, please contact us.