19.07.2016

“Hallelujah, I’m free!” Exiting a multi-owner SME – the importance of a Shareholders’ Agreement

A Shareholders' Agreement is a contract between a company's owners which should regulate the way the business operates and how owners deal with each other.

As Diane Foreman recently commented, a business can provide two sources of incomes – the 1st while you’re working in it and the 2nd when you sell up.

There are any number of reasons why a shareholder/owner of a multi-owner SME might look for an exit including:

  • a “big” moment/event in your life means that family time might become all-important or you might need to realise some cash;
  • another time-consuming venture is becoming more attractive;
  • you have fallen out with the other owners; or
  • you want to cash-in whilst Brexit and the Donald are still future events!

Equally, a majority owner of the business might be struggling to work with the minority shareholders, but the minority are refusing to go “quietly into the night”.

Alternatively, the majority owner might have negotiated a big fat exit, but to a buyer that the minority could never work with.  In such circumstances there can be two unfortunate outcomes – the minority could scupper the deal; or the buyer may not need to buy the minority’s shares to gain control and the minority can’t demand that it does so.

Our firm has seen all of the above situations many times over and, in our experience, the default provisions of the Companies Act 1993 do not usually help. Therefore, in the absence of a well-drafted Shareholders’ Agreement and constitution, it is not uncommon for lengthy, costly and largely unsatisfactory disputes to result.  Whilst our excellent litigators won’t complain, it’s highly unlikely the business will be going forward whilst precious owner energy is focussed on such a dispute (and it doesn’t do much for staff morale).

A Shareholders’ Agreement is a contract between a company’s owners which should regulate the way the business operates and how owners deal with each other.  Unlike a company’s constitution, it is not made publicly available.  For exits, it should deal with:

  • when a shareholder may exit, or be forced to exit – i.e., if a dispute can’t be resolved;
  • when shares do or do not have to be offered to existing shareholders before being sold to 3rd parties;
  • how shares will be valued and paid for upon an exit;
  • the methods by which a majority seller may include, or be forced to include, the minority in an outside sale (known as “drag along” and “tag along” rights);
  • the obligations and restrictions on departing owners.

Every business owned by more than one shareholder should have a Shareholders’ Agreement.  Creating a good one includes holding sensible discussions about important concepts whilst everyone still “gets on”.  By clarifying, amongst other things, how decisions will be made, how new funding will be obtained, how the profits will be utilised, how the business will report to key stakeholders and how disputes will be settled, Shareholders’ Agreements create or reinforce a business’ foundations.

Ideally, such discussions are held before your business gets started or very shortly afterwards.  However, a Shareholders’ Agreement can be entered into at any time… it’s only too late when you’ve already hit a problem…

If you have any questions about Shareholders’ Agreements (including your current one), or if you do not currently have one in place and would like our assistance in drafting one, please contact Chris on 09 375 8690 or email chris.lee@heskethhenry.co.nz .

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

Related Articles / Insights & Opinion

Rewriting the Risk: Lessons from John Sisk & Son Ltd v Capital & Centric (Rose) Ltd [2025] EWHC 594 (TCC)
A recent decision by the English High Court, John Sisk & Son Ltd v Capital & Centric (Rose) Ltd [2025] EWHC 594 (TCC), considered the interpretation of a risk allocation provision under a besp...
09.07.2025 Posted in Construction & Disputes
Can Contractors Terminate for Repeated Late Payment? Key Lessons from Providence v Hexagon
The decision of the English Court of Appeal in Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] EWCA Civ 962 provides important guidance on a contractor’s termination right...
09.07.2025 Posted in Construction & Disputes
Property
Make Your Premises Good Again
With all the time, effort and cost that goes into taking on a new lease of commercial premises, what happens when it comes time to move on can seem unimportant. It is not surprising, then that make-go...
25.06.2025 Posted in Property
Flooded car
Flooding due to overland flow paths and damaged drainage
Persistent heavy rainfall across the country often results in damage to property due to flooding caused by overland flow paths and defective drainage.  But who is responsible for the cost of the dama...
17.06.2025 Posted in Climate Change & Property
Understanding Indirect Privacy Notification: What you need to know
The Privacy Amendment Bill (the Bill), if passed into law, will require agencies to notify individuals when their personal information is collected from a source other than the individual themselves, ...
16.06.2025 Posted in Corporate & Commercial & Employment
iStock  Succession Plan medium
Family Ties: Intra-Family Succession and Exit Planning
As the second instalment in a series of articles looking at the generational wealth transition and its impacts on business succession in New Zealand, Ben Hickson (partner, Corporate & Commercial...
16.06.2025 Posted in Corporate & Commercial & Private Wealth
Employment law at a glance – June 2025
If you are anything like us, you will be shocked to realise that we are halfway into 2025. As time has been marching on, so too have employment law developments – and there have certainly been quite...
05.06.2025 Posted in Employment
SEND AN ENQUIRY
Send us an enquiry

For expert legal advice, please complete the form below or call us on (09) 375 8700.