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Learn Shareholder Agreements
Mar 19, 2020
Why do you need a Shareholder Agreement?
A Shareholder Agreement is an agreement between shareholders (separate from a Constitution) or partners (separate from a partnership deed) setting out;
What happens concerning your interest in the business:
- If you die, suffer total permanent disability or Trauma, (i.e. how can you turn your interest in the business into money for your family).
- If your co-shareholder or business partner dies or suffers incapacity, (i.e. will you end up working with somebody who can no longer “pull his or her weight” or with their spouse (as the inheritor under their Will) trying to get involved, or can you force the deceased/incapacitated party to sell out and if so, for how much).
- If you want to exit the company, (i.e. when you wish to retire, is there an orderly process for this to happen at a fair price or could “obstacles” be put in your way).
What happens when a partner is in a relationship property dispute?
What shareholders expectations are concerning each entering into agreements with their spouses/relationship partners sorting out ahead of time what happens to shareholdings in the business if they split up (i.e. specifically we can require shareholders to enter into a property relationship agreement with their spouse whereby they agree that in the eventuality of a separation that the business falls into the share of the person who is active in the business and the spouse is only entitled to claim other assets).
Do you have the right type of insurance?
Who holds what insurance over which key personnel and when and to whom in these eventualities, is it paid.
Do you have a Buy Sell Agreement?
Sooner or later ONE OR MORE OF THESE THINGS WILL HAPPEN to you and although often an orderly arrangement can be arrived at, in other situations what is an already stressful time is turned into a positive nightmare with such events triggering in-fighting, “book cooking” and the total breakdown of what was once a good working relationship, as various party’s suddenly find themselves under pressure to buy or sell what has often been up to that point, their life’s work.
Incidentally you should review at the same time;
- Your estate planning and whether or not as part of this;
- Can you legally minimise the amount of income tax you are liable to pay, (i.e. by possibly; Restructuring, so as to spread income between yourself, the business, trusts and family so as to maximise marginal income tax brackets. Swapping non tax deductible borrowing for borrowing that is tax deductible).
- If a Family Trust is desirable.
- Your Wills, Living Wills and Enduring Powers of Attorney are up to date.
- Terms and Conditions of Trade.
- Whether or not you have written Employment Agreements.
- Whether or not you should have a Property Relationship Agreement (or if you have an old one, a review of that).
Where to from here?
We would suggest that you;
- Call us to arrange a short meeting for a flat fee to discuss.
- Contact your insurance broker to discuss availability of relevant insurance. We can refer you to brokers if you would like.
- If you like what you hear, we can then proceed further, in the unlikely event you don’t, then at least you will have addressed the matter and made an informed decision.
An effective Shareholder Agreement needs to be drafted by an experienced family lawyer. Please note this article does not constitute legal advice and may be outdated. Contact our team in Christchurch today to find out more
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A Shareholder Agreement is an essential legal document for any business owned by more than one person (not being their relationship partner) It’s a legally binding agreement between shareholders or business partners to establish a framework of how the company should be operated and outlines the rights, obligations and roles of the shareholders when (not if) one of the eventualities occur. What is in a Shareholder Agreement NZ? Shareholder Agreements include, but are not limited to covering off: One of you are: Dying Suffering total permanent disability Suffering trauma Waiting to retire You started fighting and neither want to leave If leaving how a fair price for your interest is fixed What happens if the others refuse to buy you out What happens if you are leaving and have money tied up in the business Controls around hiring/firing, borrowing, extending credit and changing business directors etc Why do you need a Shareholders Agreement in New Zealand? Consider a Shareholders Agreement as the bedrock of a business structure ; without it, the business’ foundation becomes precarious. It ensures shareholders are treated fairly and their rights are protected, whether from internal conflicts to ambiguity regarding share valuation and shareholder roles. Essentially, it serves as a proactive measure to avoid potential crises and gives structured processes to stop disagreements escalating and avoid complications.
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