The room went silent. The temperature dropped and you could have cut the increased tension that now gripped my office with a plastic spoon. If there had been dogs nearby, one would have looked at me, shook its head and given a solitary howl.
“So, what you are saying to us is that we already need to think about breaking up when we are only just starting out?” I paused to consider this. That was a different conversation and one that I have already prepared for my daughters when they reach their teens.
“Yes, that is precisely what I’m saying. Think about the divorce before the marriage.” I replied as it suddenly dawned on me why I wasn’t getting invited to as many engagement parties as I had previously.
“Seriously” I went on, “think of it in the same way as you would when taking out life insurance. You don’t do it because you think you are going to fall over and die at that point in time. You do it to have in place measures just in case you do. You want to be sure everything is taken care of.”
“I appreciate that with any new business, the start is exciting and it is ‘all for one and one for all, together forever through the good or bad’, but trust me, in some businesses it doesn’t always stay like that. Priorities and circumstances can change and it is important to ensure that you minimise the damage that a fall out can cause at the outset. Remember Paul McCartney was best of mates with John Lennon, but less so with Yoko” I added.
My hugely topical music reference failed, so I changed track. “Including a clause of this nature within the shareholders agreement really isn’t any different to a clause as to preferential voting rights or uneven profit distribution.”
“You can do that?” they said, both turning to look at one another. I could see in their faces a slight smile as each began to contemplate a bigger share of the pie.
“Try this then guys,” I said “it will make it easier to raise finance and, if a buyer comes along, it may increase the value of the offer and the ease at which it could be sold.”
Now focussed with the future potential of a business sale for a greater return and happy with this as a basis for such a clause, the temperature in the room rose back to normal, the fictitious dog stopped howling, we all put down our plastic spoons and once more, all was good with the world.
Okay, so most of the above didn’t happen, but while I try to approach this subject from a lighter angle, the message is a serious one. Unless you are an owner/ manager in a company in which you are the only shareholder and director, you need a shareholders agreement. In layman’s terms, they just make running a company a whole lot easier, particularly if things start to go wrong.
And, if you don’t trust me on this (and why would you, I am a lawyer, I draft these things, it is of course in my interest to say this), look at those corporations whose leaders’ success stories and names are synonymous with global achievement.
Think about Apple or Facebook. We have all seen the movies even if we are not fully across their history. You will agree not all of the founders in those businesses made it to the end to achieve their share of the success and recognition. When was the last time you were sent a meme of a smiling Eduardo Severin telling you to ‘recruit for personality because skill can be taught’? Never, right?
Although there is no requirement have a shareholder agreement most successful companies will have one. They do so because shareholders agreements work on so many different levels. A shareholders agreement ensures and demonstrates that the responsibilities and requirements of running a company have properly been thought through. This can help reduce conflict in the future. Everyone knows what their role is and what they are required to do. It has been discussed and written down.
It will also provide protection for the shareholders. Without a shareholders agreement, a company’s rules are those contained within its articles which too often are weak when it comes to providing shareholder protection. You would be surprised at how many companies simply have off the shelf articles. There are of course protections contained within the law however having to take matters to court to resolve issues requires time and money that could be better spent elsewhere. A shareholders agreement will work in conjunction with the company’s articles and can be drafted to vary what would otherwise be the legal position provided for in the Corporations Act.
By way of example, the distribution of profits and voting rights can be varied to suit the circumstances. This is particularly relevant where there is an inequality between the equity invested and the management roles of shareholders. Where there are shareholders who are not directors of the company but who wish to maintain a degree of control, then a shareholders agreement is very important. In the absence of a shareholders agreement containing restrictions on the powers of directors, then many of the decisions will be made by the board without input from the shareholders.
Shareholders agreements also assist when a company matures and it seeks further funding from investors or by loan. It will demonstrate that there is stability within the company and with the inclusion of dispute resolution clauses, mechanisms to resolve instability if it occurs. It can provide for provisions where the circumstances of one particular shareholder change to avoid an adverse effect on the company as a whole.
When there are minority shareholdings it can include ‘drag along’ and ‘tag along’provisions which assist at the time of a share sale, as well as general provisions which govern the sale of shares. It can include provisions requiring a party to sell their shareholding in the event of a number of ‘triggers’ as well as to provide a general structure for how shareholdings are to be valued.
For me, shareholders agreements are an important tool for business succession planning but that is a topic for another day.
Now, having championed their cause in such a way, I do feel that I that I must offer a word of warning, a caveat. A shareholders agreement will not fix something that becomes broken, it only make it easier to manage the breakup. Breakups still happen.
And I will stop there before I find myself being asked not to attend any future invites to baptisms or christenings.