Shareholders Agreement – Why You Need One

If you co-own a business with someone else, or if you are in the process of setting up a business venture with someone, then now is the time to think about either a shareholders agreement, partnership agreement or joint venture agreement (also known as ‘Co-ownership Agreements’)

What are Co-ownership Agreements?

Co-ownership Agreements are confidential ‘living’ documents that set out the rules around governance & conduct of the co-owners of a business. One of the most common issues dealt with in Co-ownership Agreements are buy/sell arrangements in the event that one of the co-owners wants to, or is forced to leave, the business and these are discussed in more detail below. However, there are many other issues that can be addressed in a Co-ownership Agreement, such as:

• Roles & responsibilities of the business owners.
• Funding business activities and incurring debt.
• Non-competition & restraint of trade provisions.
• Management deadlock provisions.

These matters are critical to the success of a business and they should form part of the initial discussions between you and your fellow co-owners, so that you have a solid foundation from which to build your business together.

Buy/Sell Arrangements – Because ‘In Business Together Is Never Forever’

All business relationships come to an end for all sorts of reasons, whether it is a result of a breakdown in the business relationship or the death or retirement of one of the co-owners. However, experience tells us that when you are in the throws of creating a new joint business venture, with all the positive energy and enthusiasm that entails, this fact is all too often forgotten with little thought how that reality would play out.

In our experience, it is better to plan for these sorts of events, so that if it occurs there are processes and systems in place that help to minimise disputes and disruption to your business. This will allow you to deal with the changes to your business with as little disruption as possible, which has got to be good for the ‘bottom line’.   Set out below are some examples of the types of buy/sell events & issues that need to be considered:

1. Sale of Shares: A co-owner wants to sell their shares in the business. Should that co-owner be able to sell those shares to any third party, or should they be offered to the other existing co-owners first?   And at what price?
2. Death & Disability: A co-owner becomes permanently disabled and unable to work, or dies. Should the disabled co-owner or the deceased co-owner’s estate continue to receive dividend income? Perhaps it would be appropriate to put life, trauma and/or total permanent disability (TPD) insurance policies in place for each co-owner to fund a buy out of the disabled or deceased co-owner’s shares in the business?
3. Domestic Relationship Breakdown: The domestic relationship (eg. marriage) of one of the co-owners breaks down. A co-owner’s shares in the business may be subject to division upon the breakdown of their domestic relationship. In these circumstances, would it be appropriate to provide that no-one can become a co-owner without the remaining co-owners’ consent?   Should you be able to force the sale of that co-owner’s shareholder to the remaining shareholders at a pre-agreed price? Alternatively, you and your fellow co-owners may think it is appropriate to protect your shares by entering into an appropriate ‘asset protection’ structure now, before things get messy.

1. Insolvency: One of the co-owners gets into financial difficulties resulting in the other co-owners having to deal with the official assignee, liquidator or receiver of that co-owner. The same considerations apply to these circumstances as the case with a domestic relationship breakdown.

If you’re starting out in business with others or, if you think that your existing co-owned business would benefit from a discussion with your current co-owners around these issues, then we encourage you to give us a call, so that we can discuss whether or not a Co-ownership Agreement is right for you.