We hear it time and time again – if only we’d signed that agreement while we got along! And now that we don’t, we don’t have a clear set of rules to get us out of this mess. And so it goes.
But you have a choice – do it while things are hot! At the beginning! When everyone is agreeable and eager to cooperate with moving ahead with the big business plans! Sure, it’s extra work on top of all the other million things you have to do, but it will be worth it. Why? Read on.
So we all know what shareholders’ agreements do, right? No? Not 100% sure? In essence, the shareholders’ agreement guides the shareholders in how they “govern” their business – usually, who will be a director, how that person will be nominated and elected, what sorts of approvals will be required for business decisions, how do you go about financing the business if it requires more capital, and how you can exit the business, etc.
It can provide various methods to deal with a desired or hoped for sale of the business, or at least a shareholder’s ownership interest in the business (i.e. the shares held by such shareholder). These may involve concepts such as “Rights of First Refusal” (ROFR), “Rights of First Offer” (ROFO), “Drag-Along Rights”, “Tag-Along (Piggyback) Rights”, and so forth.
Ideally, it also addresses the thorny issue of what happens if business partners are having trouble getting along and how to overcome decision-making roadblocks. The concept of the “Shotgun” buy-sell arrangements, “puts” (where a shareholder can force another shareholder to by such shareholder’s shares) and “calls” (where a shareholder can force another shareholder to sell such shareholder’s shares) can all play a role in overcoming control issues where shareholders may not otherwise be disposed to resolve matters.
A final area is automatic buy or sell rights in the event a shareholder runs into personal issues (sometimes beyond anyone’s control) that might affect such shareholder’s ability to act as a shareholder, director or executive or that could impact the other shareholders – death, incapacity, divorce, insolvency/bankruptcy, conviction for a criminal offence, etc.
All of the above can be structured in a manner that respects the balance of power between shareholders while reducing the opportunity for abusive or commercially harmful behaviour if unexpected personal events occur or a previously congenial and effective business environment deteriorates.
While sorting out these types of items will involve a focussed commitment of time to discuss and decide the outcomes that are most appropriate for the business and the people involved, doing it while the relationship is hot will greatly improve the ability to address and resolve shareholder issues should they occur years later.
If you have a hot business relationship you want to make sure you can manage properly in the future and need help sorting out the many potential options along with drafting the right agreement, then give us a call – we are ready to help.