5.07.2019

“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_100x100 1
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

Phishing for payment: How Team New Zealand was scammed
Hackers often try to scam entities making international payments by impersonating one, or both, parties to the payment.
Requirements for international yachts and crew entering New Zealand
While New Zealand’s sea borders are currently closed to most foreign Flagged vessels, a number of pleasure craft and super yachts in the Pacific are hoping to enter New Zealand in time for the Ameri...
04.12.2020 Posted in Maritime Law
Class Actions – Supreme Court rules it’s “opt-out”, Law Commission Issues Paper imminent
Following the Supreme Court decision in Southern Response v Ross [2020] NZSC 126 the Law Commission is now set to release its Issues Paper on Class Actions and Litigation Funding on 4 December 2020. ...
The Commerce Commission is set to undertake a market study into the Retail Grocery Sector
On 17 November 2020 the Minister of Commerce and Consumer Affairs announced a market study into the retail grocery sector through the Commerce Commission under Part 3A of the Commerce Act 1986 (Act)....
Court of Appeal cuts fine for Steel & Tube’s breaches of the Fair Trading Act 
The Court of Appeal in Commerce Commission v Steel & Tube Holdings Limited [2020] NZCA 549 has set aside last year’s High Court decision under the Fair Trading Act 1986 (FTA) where it imposed a ...
My way or the highway: repudiation, cancellation and dispute resolution clauses
In Jade Residential Ltd v Paul, the Court of Appeal reviewed two issues which may arise in contractual disputes: The right to cancel a contract for “partial” repudiation; and Whether an aggrieved...
Making up the shortfall: Subcontractor awarded an interim injunction requiring head contractor to hold its retentions in a separate trust account
In a recent High Court decision,[1] Hanlon Plumbing Limited (Hanlon) successfully obtained an interim injunction on a without notice basis requiring Downey Construction Limited (Downey) to pay retenti...
16.11.2020 Posted in Construction Law
Send us an enquiry
For expert legal advice, please complete the form below or call us on (09) 375 8700.
  • This field is for validation purposes and should be left unchanged.
-->