The ins and outs of creating a shareholders agreement
The start of a new business venture is an exciting opportunity. One would hope all involved parties only have the best intentions in mind. In our experience, although these relationships start on a positive note external factors and influences can create a shift in position. This can turn the business relationship sour virtually overnight. In these situations, a robust shareholders agreement will be of indisputable value.
A business is like a marriage
It is imperative to have good communication skills and the ability to resolve and manage conflicts in both business and marital relationships. Without these skills, it will be difficult for all parties to build and maintain trust and confidence in one another, especially when it comes to overcoming challenges. A successful relationship needs clearly defined boundaries, goals, and a mutual understanding of what’s working, and what isn’t, and how to better collaborate to ensure these goals are met.
People often get caught up by the excitement of a new opportunity and rush into business relationships without first setting a strong and stable foundation. Without careful thought into the business or relationship it will be more susceptible to tough periods.
Disputes are inevitable
Shareholder disputes are inevitable. In our experience shareholder disputes in declining companies are just as common as disputes in successful companies. Arguably, it is more common for successful companies to have shareholder disputes. Rapid growth and high cash flow can cause shareholders to have a shift in perspective, leading to a potential conflict of interest as to how the company should be run in this new and exciting stage.
The taste of success or the prospect of doom can affect even the humblest of business partners and cause a dispute. However, it will be how you handle said dispute that will determine the solution.
If you fail to prepare, prepare to fail.
It is better to be safe than sorry, especially in situations where money and reputation are on the line.
Our past clients will tell you that it’s easier to agree on set rules and boundaries when the relationship is good, rather than in the face of a dispute. When a business relationship turns sour trust can be fleeting resulting in more time and money spent on negotiating a mutually agreeable outcome. If there are more than two shareholders involved the situation can evolve into an exercise of whose side to pick.
A simple sit-down conversation at the beginning of a business relationship has helped our prior clients:
Learn more about the character, beliefs, and general position of their (potential) business partner(s);
Communicate with their (potential) business partner(s) what is fundamentally important to them;
Realise what needs to be documented to help safeguard the best interests of the parties and the company moving forward; and
Sometimes, decide not to be involved with the other person(s) in business.
In saying this, great care needs to be taken when it comes to creating the shareholders agreement itself. Unlike other legal documents, a standard template will not be of value. Each shareholder agreement must be the product of the circumstances and the discussions of the individual shareholders.
A good shareholders agreement is a ‘living’ document. A well drafted agreement will encompass a wide range of possible scenarios and will provide solutions/guidance on each occasion. Shareholders agreement can also be regularly updated with the consent of all participating parties. In comparison, a standardised document will not be of use when push comes to shove. The upfront cost of preparing robust documentation is easily justified if a business relationship sours and lawyers are called in to fight.
If it all goes wrong
Sometimes, even with good documentation, disputes are inevitable and Court intervention may be required.
This is where our innovative solutions for shareholder disputes provide clients with the most value.
We are specialist lawyers who resolve commercial disputes and can help you strategically navigate any commercial dispute or Court action quickly and efficiently. If you want to talk, schedule a no obligation 30-minute consultation with our experts here:https://norlinglaw.co.nz/consultation/
Overall, the key takeaways are:
Shareholder disputes are extremely costly to resolve.
They can be avoided if you have a robust, well-drafted, and well-considered shareholders agreement put in place.
Unfortunately, there is some upfront cost for this, but that is easily justified when a dispute arises, or shareholders wish to part ways.
Sometimes Court intervention is unavoidable. For the best result, you should engage transparent expert commercial lawyers who can tackle your problems strategically and efficiently.
A liquidation is the means by which a company’s assets are collected and distributed to its creditors in a set scheme of priorities. Both the shareholders and creditors of a company can put it into liquidation through different methods.
When a company is liquidated, a vast amount of discretion is conferred upon the liquidator or liquidators. Their primary duty is to realise the assets for the highest price possible to pay out creditors. However, liquidators are not under any strict duty to litigate potential breaches of director duties.
Accordingly, sometimes there is a big difference in steps taken by a shareholder appointed liquidator (being a liquidator appointed by the shareholders of a company) and a creditor appointed liquidator (being a liquidator appointment by the creditors of a company).
The below case study is an example of creditors replacing a shareholder appointed liquidator with a liquidator of their choice in the hopes of receiving a better outcome.
The following is a case study on steps we have taken for clients. If we can be of assistance to you, take advantage of our FREE 30-minute Legal Consultation.
Case Study
Originally, Norling Law was engaged to act for multiple creditors (“the Creditors”) of Vijay Holdings Limited (“the Company”) and was instructed to resolve a dispute regarding the payment of a debt from the Company to those creditors. Norling Law had previously made demands and taken steps to realise the debts for the Creditors.
Unknown to the Creditors and after demands were made, on 6 November 2020 at 11:00am, the shareholders placed the Company into liquidation. Daran Nair and Heiko Draht of Greenlane Chartered Accountants (“the Original Liquidators”) were appointed, jointly and severally, as liquidators of the Company.
Norling Law advised the Creditors that in general, shareholder appointed liquidators can be seen as “friendly” to the Company as they have been appointed by the owners of the Company (being the shareholders) and were also unlikely to pursue and litigate claims due to not being under any statutory obligation to do so.
Norling Law advised the Creditors that a creditor appointed liquidator would likely be more aggressive in examining the conduct of the Company and its directors, potentially resulting in more recoveries for the creditors of the Company.
Ordinarily, liquidators of a company must call a meeting of the creditors of the company in liquidation for the purpose of resolving whether to confirm the appointment of the liquidator or to appoint another liquidator (s 243(1)(a) Companies Act 1993 (“the Act”)).
The Original Liquidators did not call a meeting of the creditors but rather, pursuant to s 245 of the Act, provided notice to creditors to dispense with the meeting of creditors.
Subsequently, pursuant to s 314(2) of the Act, Norling Law made a request to the Original Liquidators to call a meeting of creditors for the purpose of voting on the replacement of the Original Liquidators, for a creditor appointed liquidator.
In response, Norling Law wrote to the Original Liquidators stating that the Creditors intended to exercise their right to request that the Original Liquidators call a creditors’ meeting as per the Creditors’ s245(1)(b)(iii) of the Act right for the purpose of reviewing the Original Liquidators’ appointment and to vote on whether they shall be replaced with another liquidator.
On 7 December 2020, the Original Liquidators provided notice to all creditors of the Company that the meeting would be convened on 17 December 2020 at 2:00 pm via postal ballot only, with a postal voting form that had to be submitted by 15 December 2020 at 2:00 pm. This meant that there would be no in-person meeting and all votes had to be sent to a third party who chaired the meeting by this date.
Norling Law had 8 days to persuade the creditors of the Company to vote out the Original Liquidators.
Norling Law achieved this by individually contacting and talking to credit managers, directors, and accounts teams throughout the country, explaining the differences between a shareholder appointed liquidator and a creditor appointed liquidator.
On 17 December 2020, Norling Law received confirmation that its preferred liquidator, Gregory John Sherriff of Waterstone Insolvency was voted in, replacing the Original Liquidators. 93.33% of the number of creditors and 98.58% of the value of creditors voted to replace the Original Liquidators.
Norling Law trusts that Mr. Sherriff and Waterstone will fully investigate the Company’s affairs and the directors’ conduct with scrutiny.
Norling Law considers that this will produce the best possible results for the Creditors.
Please refer to our People for more information on who we are, our experience, and how we can help you.
