Last month my associate Hilary Pritchard wrote a great article that highlighted the function of unanimous shareholder’s agreements (USA’s) for businesses.
I think it is helpful to examine some of the main scenarios where USAs can provide solutions which are preferable over going through the court system. Consider the following issues:
1) The Minority Shareholder Dilemma:
If you own a smaller percentage in a company (say 25% or less), your power in the company may be restricted by the majority shareholder(s). The majority shareholder may direct the business without your imput. They may appoint directors and officers of the company or remove you as either. If you own a separate class of shares from the majority owner, they can prevent dividends from being to be issued to you, meanwhile issuing dividends to themselves. You may be essentially frozen out of the company and your main recourse is to bring a court application for shareholder oppression.
2) The Post Mortem Partner:
If your business partner dies, their estate (including their shares in the company) may go to their surviving spouse or children. Congratulations, you now have a new business partner, who may not know a lot about or be interested in the company operations. They may have different views from you on the commitment to keep the company in business. Worse yet, you may have never really liked your business partner’s spouse and children and they become the majority shareholders of the company.
3) The Sell-out Predicament:
When you went into business with another person, you may not have discussed business succession. You may be interested in maintaining the business and would like the first opportunity to buy the shares of your business partner when they chose to retire or leave the company. Meanwhile, your business partner plans to sell their shares to an outside party whom you don’t know. The majority shareholder could sell their shares to a stranger without your consent.
4) The Valuation Challenge:
What if your business partner is willing to sell their shares to you, but you are miles apart on value. You think the shares they want to sell are worth a lot less than their price. So you hire a business valuator to conduct a valuation and they come up with a value. The business partner hires their own business valuator, who makes different assumptions and comes up with a different value. Meanwhile the value of the business drops due to shareholder in-fighting.
Do you see how these issues can affect the operations and possibly the survival of the business? Do any of these issues make you worried or keep you up at night? If so, I recommend you proactively seek advise from your legal and accounting, and insurance professionals. Agreeing to the terms of a USA for a business is more likely to be successful when the relationship between the stakeholders is going well.
You can refer to the court process to resolve these types of business issues. Unfortunately what the legal process provides in terms of certainty, it can take away in terms of cost, time, and control of outcomes.