When you go into business with other stakeholders you should have a document in place which sets out the legal relationship between you and the other business owners.
Most company constitutions, unit trust deeds or even partnership agreements are not suitable and need to be augmented by an agreement the lays over the top of the generic style company constitution or unit trust deed.
In each case, you would want to make sure there is in place an agreement between the shareholders, unit holders or partners set out in a shareholders' agreement, unitholders' agreement or partnership agreement which effectively regulates the legal relationship between the stakeholders.
The main areas that may need to be covered and have a workable solution include:
- Sharing financial obligations and benefits in proportion to equity holding or some other agreed proportion;
- Setting up a structure for decision making processes determining what types of decisions require ordinary, special or unanimous stakeholder approval
- The circumstances in which dividends or profits are declared or distributed;
- Future funding arrangements;
- Method or mechanism for resolving disputes or an impasse between stakeholders;
- What the mechanism is for future allotment of shares and do they have to be equal;
- Restriction of transfer of shares – pre-emptive rights with the exemption for transfers within "family" or to associates. Also, deeming of transfer of underlying interest to invoke transfer provisions. Tag along and drag along provisions.
- The terms of any shareholders loans – agreed interest rate or benchmark rate or interest free;
- What happens in the event of death or incapacity of member and/or director- what are the consequences for transfer of shares, continued running of the business etc;
- Decisions of the Board – which decisions require unanimous or greater than an agreed percentage of directors to vote in favour e.g. restrictions on borrowing, lending, change of dividend policy, incurring expenditure with limits;
- Whether any of the directors or shareholders or other participants are to be employed in the business and if so on what terms;
- Business plan, accounts and reports – what is the timing for these, their content and distribution.
- Whether there should be options for exiting and continuing principals, e.g. the power to nominate a buyer.
- Events that might lead to dissolution or forced exit, e.g. bankruptcy, fraud.
- Funding available for contingencies such as ill-health or death of a principal, e.g. income continuance and equity insurance backed by an agreement or life insurance for trauma events or death;
- Structure for ownership of key assets pre and post exit, e.g. the intellectual property – a principal may have bought into the business and might want to lease or licence intellectual property to the business, rather than to hand it over to the business.
- Whether to have the business assets (including intellectual property) licenced for use by the business risk entity thus protecting those assets from business risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.