I'm a bit late with sharing my latest Leadership Magazine articles. Here's February's edition (there wasn't a publication in January 2018). My article is available here on page 110 and 111.
Agree to agreements
When I started Reputation Matters just over thirteen years ago, the business began as a 50/50 partnership with myself and a partner. We didn’t really worry about the paperwork; we knew we should get a shareholder agreement, but felt that we were in complete agreement and didn’t really bother about it. I still remember clearly that two and a half years into the arrangement (when there was still no agreement in place), I naively thought to myself how incredibly lucky I was to have a business partner that shared the same values and that we were ‘getting it right.’ Unfortunately, I had turned a blind eye to quite a few red flags, and if we had signed a shareholder agreement earlier in the life of the business, we could have avoided many issues when the pawpaw sadly hit the fan three years later.
Not having the correct paperwork in place can be incredibly detrimental for a business. It can cause problems on so many levels, including negatively impacting its reputation. I often hear of start-up owners in partnership who say, “We are on the same page” or “We have the same values and trust each other.” These are the reasons they give for why they don’t have a shareholder agreement in place. Trusting each other is great, but if that is the case, then trust and respect each other enough to have that conversation sooner rather than later. It’s easier to have the difficult conversations when you still like each other.
I turned to dynamic Cape Town based commercial law attorney, Robyn Hey to find out more about shareholder agreements:
Why is a shareholder agreement so important? A shareholder’s agreement is one of the key documents which any company with more than one shareholder needs. Although the company’s memorandum of incorporation is the overriding document for a company, a shareholder’s agreement deals with matters that are strictly between shareholders, which are private. A well drafted shareholder’s agreement can prevent disputes between shareholders and facilitate the smooth running of the company.
Why invest in a legal professional and not an “off the shelf agreement” that you can buy at a stationary shop? I get this question all the time. Standard agreements are fine for standard situations. However, in the cut and thrust of business, especially where more than one business owner is involved, there is no such thing as a standard situation. Every business needs an agreement which makes sense given the personality of the owners, the goals of the company and ethos of the people that work there. Good legal agreements give your company a voice and provide mechanisms that protect a business in the context of its industry.
What according to you are the three key things that MUST be in a shareholder agreement?
Lawyers’ views on this differ but in my opinion the following three things should be in the shareholder agreement:
a) Any restraints of trade or confidentiality provisions which apply to shareholders both while they are shareholders and after they dispose of their shareholding.
b) Valuation methods for buying and selling of shares.
c) Funding obligations of shareholders. What money must a shareholder contribute to a company, when must this be contributed and what are the terms of the contribution. Finally, what happens if a shareholder can’t contribute?
I know I limited Robyn to only three points here, but I also would like to suggest an additional aspect: how to split debt and profits when that time comes, and what happens to employees. I burnt my fingers on this point after our partnership dissolved as I had to go through a retrenchment exercise with some staff; my former business partner then poached my staff who had remained employed by me.
How often should a shareholder agreement be reviewed?
In a perfect world, key agreements should be reviewed annually by an attorney to see whether there have been any changes to the law which may impact the agreement. If this is not possible or practical then they should be reviewed before any new shareholders are admitted, when the company is planning a big acquisition and when there are plans for any substantive changes to the company’s structure or operations. In these circumstances, both the company’s memorandum of incorporation and shareholder’s agreement should be reviewed.
What is the biggest and most common mistake you see companies make concerning their shareholder agreements?
The biggest mistake is that companies don’t have shareholder agreements. Business owners, understandably, have a lot on their plate. People think that the standard documentation prepared when a company is registered is enough but very often situations arise that require the resolution of disputes and these kinds of provisions are usually only found in a shareholders agreement. Without these provisions things can get very ugly and hinder the running of even the most successful company.
One last very valuable tip from Robyn is that when deciding on an attorney to assist with this task, choose someone who is reputable experienced in business matters. A commercially minded attorney will help you think through possible scenarios that may arise because they have consulted various companies experiencing many different scenarios. It is a great investment for your business to spend time with an experienced third party who will help you think about things differently.
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