Corporate Tip – Shareholder’s Agreement

Corporate Tip – Shareholder’s Agreement

a mid shot of a lawyer's hand holding a pen and pointing to where the shareholder should sign

I started my law firm renting desk space at a very kind lawyer’s office. He was my first boss in Law, Mr. Alain A Johns of Alain A Johns Partnership. I was his intern for 2 months in 2006.

We were having coffee one day in late 2017 when I told him I wanted to strike out on my own. He asked me to join his firm as a partner, but I said I wanted to try going it alone. He respected my decision. He supported me and offered me space so I could keep costs low.

The struggle was and still is, very real. I want to be able to say, in 20 years’ time, that I built something I am proud of. So, I can empathise with founding shareholders who come into my office telling me that they have lost control of their pride and joy.

The pain of founding shareholders losing control of their company is something that can be avoided.

Over the last few months, we have filed a few suits in the High Court on behalf of founding shareholders who have been ousted from control of their companies. We are in the process of preparing more such cases to be filed. In all the cases:

 

  • The client starts a company as director and shareholder;
  • Company is successful;
  • Other directors are appointed. Shares are given/ sold to these directors.
  • The new directors take over control of the company by virtue of their numbers.
  • The client is ousted as a director.
  • The company remunerates the sitting directors well but the directors refuse to issue dividends so the Client, as a shareholder, gets nothing while watching from the sidelines.

 

Startlingly, a common thread runs through each of these cases. There was no shareholder’s agreement at all, or the shareholder’s agreement was inadequate and did not address the changing situation thereby resulting in the Client losing control of the company.

 

Before embarking on a business venture, always formalise a business structure and shareholder’s agreement.

Your shareholder’s agreement provides a roadmap to formalize roles and responsibilities, set expectations, and stipulate any matter regarding rights. This ensures that you and your partner(s) have aligned expectations.

 

What are the essential elements of a shareholder’s agreement?

The below are just some of the essential issues which should be dealt with in a shareholder’s agreement.

  1. Business Objectives
  2. Company Goals
  3. Ownership Structure
  4. Rights and Responsibilities
  5. Shares and Equity
  6. Voting Rights
  7. Vesting Schedule
  8. Intellectual Property
  9. Confidentiality
  10. Dispute Resolution
  11. Salary and Compensation
  12. Non-compete Clause, if applicable
  13. Exit Provision

 

Ideally, the co-founders must think through any potential problems that they or the business might face and brainstorm solutions to avoid issues down the road.

The most common problems occur when adding directors and shareholders. This is where the most thought is required.

 

So why do many businesses flame out?

8 out of 10 cases I have consulted on are mostly commercial disputes caused by the fact that

    1. there was no shareholder’s agreement;
    2. there was one but it was not updated as the business and relationships evolved; or
    3. there was one but one or more of the parties who signed it blindly and found themselves held at gunpoint when it came to a legal dispute.

 

While you can’t predict every conceivable outcome, there needs to be some deep thinking and frank discussion on how each founder sees things playing out during the course of running the business. This should be updated regularly as the company grows.

If you are taking the time to draft a shareholder’s agreement, follow through on your approach entirely. Contract writing with startup lawyers is more affordable than you think. Once you have obtained the final copy of your agreement, you will have reassurance in knowing that your co-founders are just as serious as you are when it comes to the vision.

Please note that this article does not constitute express or implied legal advice, whether in whole or in part. If you require legal advice, please contact us at walter@silvesterlegal.com or info@silvesterlegal.com.

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