Want to know more about shareholder/unitholder agreements to run your business?
Do you run a family business? Or are you in business with other extended family or close friends? Do your children work alongside you in the business and take an active interest? Do you have more than one of your many children actively involved in your business matters? Are they clear with their roles and responsibilities? How are conflicts resolved? Who will take your place in the event of a temporary/permanent disablement?
Often when one runs a family business or goes into business with extended family or close friends, the clear definition of everyone’s roles, responsibilities and conflict resolutions are often overlooked. There is also a lack of definitive guidance on who and how key management issues are resolved or decided. These are all important issues to consider when setting up a business as it not only mitigates the risk of any argument and disharmony; it also goes a long way in ensuring that the legacy of your blood, sweat and tears are kept within your family group should that be your wish. How then can you achieve this?
A shareholders’ agreement (or unitholders agreement if operating through a unit trust) and/or memorandum of understanding is a powerful tool that can be used in this scenario. These agreements often will outline amongst many others the following:
- Obligations of board of directors
- Business operation matters such as funding sources, restrictions on shareholders’ loans etc
- Shareholders’ roles and responsibilities
- Shareholders’ rights including rights to financial records and the rights of directors
- Methods and ways of conflict resolutions including the need for mediation
- Calculation of profit splits and any dividends or distributions policy
- Share ownership and succession including sale of shares on death
- Restraints on seller and any other restrictive covenants
- Winding up of company
It is an essential legally binding document that should not be overlooked. Keep in mind too that there is no one size fits all shareholders’ agreement. This agreement can be as definitive and restrictive as you wish.
A shareholders’ agreement seeks to minimise feuds and ambiguities. Without it, everything will be hear-say. And a shareholders’ fallout can cause a business to disintegrate very rapidly. As accountants and business advisors, we have witnessed our fair share of this. It is too late if you wait for family argument, marriage breakdown or serious illness to take place before putting these safeguards in place.