Unlike the final page-turning twist of a summer read, when it comes to business ventures, knowing the ending at the outset is not a spoiler – it makes huge commercial sense.
But what should shareholders be doing at the outset of an agreement?
Talk about the end: be clear about why each shareholder is going into business. One party may be looking for a lifetime business while the other is anticipating a three year journey. If the parties are not aligned, trouble will arise.
Exit strategy: If a lifetime business is not what the shareholders want, then when and by what means do they wish to see a return on their time, money and efforts?
Sale, investment, listing: The most common exit is a sale of the business. But growth through investment, selling shares and taking on new shareholders and growing into new markets are alternatives. For some experienced business owners a listing on a market is the goal.
Breakdowns: The Model Articles – the default governing document for all newly formed companies – do not have any provisions about how to leave or force a shareholder to go. Including some of the following in the articles or the shareholders agreement will help if a business is heading for breakdown.
Compulsory transfer: Shareholder now working at a competitor? Shareholder gone on a long sabbatical? Such actions could invoke an obligation on the shareholder to transfer their shares to the other shareholders. If they are deemed a “bad leaver” their shares may be given a significantly reduced value.
Tag and drag: Majority found a suitable buyer for the company, but minority stubbornly refusing? Minority worried that they may be left with a majority owner they don’t know, like or trust? Drag and tag rights cover these situations and can ensure that no one is left out in the cold.
Deadlock: Total breakdown in communication? Decisions not being made? Company on the verge of collapse? A deadlock clause can provide a mechanism to allow one party to buy out the other where there is little prospect of reconciling the parties differences.
Beginning with the end isn’t recommended for summer reading, but there’s no better place to start in business.
A version of this article first appeared in Business Cornwall, September 2016