OllyOn…Protecting your business with shareholder agreements
Over a series of weeks I’ll be examining some of the traps and pitfalls of operating within a private limited company structure without the protection of either a shareholders’ agreement or bespoke articles of association. Poor preparation of a company’s constitutional documents can lead to disputes and ultimately the business failing.
This week…‘Tug of War – When your 50/50 Joint Venture can’t agree’
What happens if the company in which you are involved is a 50/50 joint venture? By this I mean that there are two people involved, both of whom hold 50% of the issued share capital, and both of whom are directors.
Having read all of my previous articles with great interest, you may feel pretty confident that these scenarios do not apply to your business, however deadlocked companies can encounter their own particular set of problems and issues, especially as both people will need to agree on each material course of action in order for the business to move forward.
For example, what if a particularly exciting opportunity arises, that will require a level of investment, or maybe borrowing, in order to achieve a potentially lucrative return. One shareholder/director wants to push forward and take the risk, whereas the other is perfectly happy with the status quo.
If you cannot agree to move it forward, then the opportunity will pass you by, which will almost certainly result in resentment. The business becomes a chicken with its head cut off – it may wander around and give the impression of being alive, but it’s dead from that moment.
Within a joint venture shareholders’ agreement, we will usually include deadlock provisions, which seek to cover this eventuality. They provide a mechanism to resolve such deadlocks, which can take a variety of guises.
These can be anything from the ability for one shareholder to offer to buy out the other, which can be turned around, meaning great thought must be given to the value offered, through to the engagement of a third party who will decide on the course of action, right the way up to the nuclear option – if you can’t agree, the company will be wound up.
The latter may seem like a bridge too far, but it is amazing how quickly this will focus the mind on finding achievable middle-ground.