Don't need a Shareholders' Agreement? Really?

When people form a company, or bring a new shareholder on board, I always advise them to put in place a shareholders agreement. "Do it now while things are good" I say.
Do you know what some people say? "How much will that cost?" Or even worse "We'll be right. We've been friends for years. We trust each other." Nowadays thats when I say "That's your choice, I'll make a note that I've advised you to have one. I'll make a diary note so we can discuss this again in three years when things have turned sour." And I mean it.



Why?
Because I've seen too many disputes between our erstwhile best friends who've found that business has strained their friendship. Sometimes to the point that they now can't stand being in the same room together. If only they had taken my advice!
Having a shareholders agreement won't necessarily mean you won't have any disputes. But it will set out a framework for a lot of the flashpoints that typically cause problems within closely held companies. So what sorts of things can you cover off in a shareholder's agreement?

Well, here are some of the things you'd typically include:
1. How much can anyone spend without needing to get sign off from all the shareholders?
2. How much is retained in the company and how much is paid out as dividends? Or does the company repay shareholder loans first?
3. How much will you pay shareholder's who also work in the business by way of shareholder salary?
4. What area of responsibility will each shareholder have?
5. What is the procedure if a shareholder wants to sell his/her shares and how are those shares valued?
6. What happens if the company needs more money - does it borrow from the bank or do shareholders put more money in?
7. If they do, is it by way of loan or is it capital?
8. What happens if a shareholder doesn't contribute funds when he/she is supposed to? Does his/her shareholding get watered down?
9. Should that new shareholder who has just come onboard have to sell their shares back to you at cost within the first few years if he/she wants out?
"Aren't those things covered by the constitution or the Companies Act?" I hear you say.
No. No they're not. A lot of things are covered in the Act and can be included in the constitution. But not these.
I could tell you plenty of war stories of companies that have gone sour, but I won't. Trust me though when I say that a fight between two "former friends now shareholders" over a business that is not quite working is as bad as a marriage break up. Especially if they are both guys with their egos getting in the way. Rational thinking seems to fly out the window, and its more about "sticking it to" the other. Not a good basis for sensible dispute resolution.
We can help. At the start is best, and a smallish investment at that stage is always worth it in my view. Feel free to email me on rem@prlaw.co.nz or call me on 03-4500000. I look forward to saving you from yourself.