3.05.2018

“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 regulated 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 .

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