Shareholders or unitholders should formalize in writing ownership issues at the same time of registering a company or establishing their trust. It is critical that one considers appropriate agreements that deal with management issues as the management rules set out in the company’s constitution or trust deed do not adequately protect individual rights.
These agreements define individual’s rights, duties, and obligations as they relate to each individual and to the business. By not having these agreements in place, one faces complex legal problems and litigation if ownership disputes arise. In our experience, it is always easier to create this agreement when partners’ dealings are harmonious rather than after a dispute has arisen.
ISSUES AFFECTING MANAGEMENT & OWNERS
Managing a company or a trust is different for each business as each individual member has different needs, even though there are many common issues that affect everyone in the same way.
DISPUTES OVER MANAGEMENT OR OWNERS' RIGHTS, AND DISPUTE RESOLUTION
An agreement can anticipate ownership disputes and have a dispute resolution procedure in place that seeks to resolve disputes over owners’ rights, or provides a procedure, where dispute is deadlocked between owners who hold equal shares or units.
An agreement can anticipate how to deal with owner inequality if members cannot resolve a dispute by a simple majority vote.
OWNERS'S DEATH OR INCAPACITY
The agreement should understand the success of the business depends on all owners being able to contribute and should anticipate what will happen on the death or incapacity of an owner and includes such issues, as:
a) Succession of the business
b) Rights of that owner’s family
c) The surviving owners may need to buy out that owner’s interest especially if they cannot afford or finance the purchase, or if they do not want to buy that owner’s share or units.
OWNERS' LIFE & DISABILITY INSURANCE
The agreement can provide for life and disability insurances of the owners of the business. This risk cover is useful when it is necessary to buy the interests of an owner who has died or has a disability, and can provide cash flow resulting from the loss to the business caused by the owner’s death or disability.
EMPLOYMENT BREACHES & MISCONDUCT BY OWNER
The agreement can set out the terms and conditions on which one can terminate an owner, and if necessary provide a process to buy out that owner's shares or units.
TREATMENT OF OWNER'S CAPITAL IN THE BUSINESS
The agreement can set out whether to treat these funds as equity or loans, and the terms and conditions of the investment or the loan.
The agreement can set out the range of activities that the business will carry out. It may even restrict the range of activities, investment, or business.
OWNERS' PERSONAL GURANTEEES
Banks, financiers, trade creditors, or suppliers will require owners of the business to give and provide:
a) Personal guarantees; and
b) Security over homes, or personal assets, to secure payment of debts and liabilities of the business
Usually owners must provide personal guarantees or security to borrow money regardless of the amount of their shareholding. For example, an individual who holds 10% must provide the same personal guarantee as an individual holding the remaining 90%. Neither the company’s constitution nor the trust deed requires owners to accept liability for any guarantee that is proportionate to their holding.
The agreement should anticipate the different proportions; provide for different contributions and indemnities, and set out the terms and conditions on which one gives a personal guarantee or security on a fair basis.
ENTRY OF NEW OWNERS
The agreement can consider the introduction of new owners and the terms on which a new owner enters the company or trust. The agreement usually requires new owners to acknowledge and agree that the terms of any existing shareholder & unitholder agreement are binding before joining.
The agreement is both complex and critical to the successful and strategic management of the business. Its proper implementation sets out an agreed framework within which to act. As a result, it can save valuable time, effort and resources in resolving what otherwise might be most difficult, and in some cases insoluble problems.
NEED MORE INFORMATION
Behan Legal advises and assists on these important issues. For an appointment, call 03 9646 0344