11 October 2022 | Reading time: 2 minutes
We’ve all dreamed of it, we’ve all definitely discussed it over a drink or 2, and some of us have even done it – start a company with a friend.
‘What could possibly go wrong?’
‘We’d be unstoppable!’
‘With my good looks and your smarts, nothing could possibly get in our way!’
In a classic Simpsons episode, Homer aptly compared a marriage to an orange. Just like a marriage, starting a company with a good friend, family member or even an acquaintance starts with nothing but blue skies ahead. And just like a marriage, inevitably there will be bumps along the way and you and your shareholders will need to navigate through some grey skies.
It is during those testing times that shareholders all too often wonder out aloud – ‘why did we not enter into a Shareholders’ Agreement?’. D’oh!
What is a Shareholders’ Agreement?
A Shareholders’ Agreement is a document that sets out the rights and responsibilities of shareholders. It defines the terms of the relationship between shareholders before business activities commence. If drafted correctly, it also serves as a helpful ‘prenuptial agreement’ when those grey skies turn into storm clouds and shareholders want to exit.
Below are examples of how a Shareholders’ Agreement can assist a company:
A reliable reference point
A Shareholders’ Agreement should clearly set out how the company and its affairs are administered. These include:
As each Shareholders’ Agreement is a unique document, they should be tailored to the company’s specific needs.
Who wears the pants?
A Shareholders’ Agreement should deal with the delegation of authority. With competing interests and ideas, it is imperative shareholders agree from the outset how decisions are to be made by the company.
This will typically include distinguishing between:
Decision making provisions should also outline the process by which decisions are to be made (eg by majority vote, unanimous approval etc).
Storm clouds ahead
Just like no marriage is perfect, it is rare to find shareholders who never clash. Therefore, rather than sticking your head in the sand and telling yourself ‘it will never happen to us’, you should agree the rules of the fight while everyone is warm and cuddly.
You should think ahead and incorporate exit and change requirements, together with a dispute resolution process as part of your Shareholders’ Agreement. In doing so, you have the potential to avoid an ugly break-up down the track and avoid scenarios such as corporate deadlocks.
Hope for the best, plan for the worst
Homer Simpson’s classic line sums it up, ‘The eating of an orange is just like a marriage. First you have the skin then the sweet insides’.
Just like Homer, we hope shareholders enjoy smooth sailing until ‘death do us part’. Nevertheless, there is a fine line between ambition and naivety. That’s why we insist our clients enter into a Shareholders’ Agreement and be glad if they never need to look at it.
Thanks for the advice Homer!