Do you know that nearly 66% of New Zealand businesses fail? While this statistic may sound alarming, it is important to consider the reasons behind these failures. One major factor that contributes to the downfall of businesses, particularly small businesses, is the lack of appropriate shareholder agreements. In this blog post, we will delve into the world of shareholder disputes and explore some common pitfalls that can lead to these conflicts. Let’s learn how you can protect your business and avoid costly legal battles.
Before we dive into the details, let’s first understand the significance of shareholder agreements. When multiple business owners come together to form a company, it is crucial to establish clear guidelines and expectations. A well-structured shareholder agreement serves as a roadmap for all parties involved, outlining their roles, responsibilities, and how critical decisions will be made. Without such an agreement, disputes are more likely to arise, fueled by differing expectations and perceptions of fairness.
Many shareholder disputes stem from financial success. As money starts to flow into the business, one party may feel that they are contributing more than others and deserve a larger share of the profits. This sense of entitlement can quickly become a breeding ground for conflicts. Furthermore, disputes can emerge when one shareholder believes they are bringing in more clients or putting in more effort, leading to a power struggle within the company. Greed and a distorted perception of fairness can drive people into corners, often resulting in legal battles that can be devastating for the business.
To avoid these disputes, it is crucial to invest in a well-crafted shareholder agreement tailored to the specific needs of your business and its shareholders. Template agreements may seem convenient, but they often fail to address the unique dynamics and potential challenges that your business may face. To create a robust agreement, consider the following essential elements:
Even with a well-crafted shareholder agreement, conflicts may still arise. It is essential to address dispute resolution methods in advance. The most common options include mediation, arbitration, negotiation, or resorting to the courts. Each method has its pros and cons, and determining the most suitable approach for your company will largely depend on its unique circumstances. Don’t fall into the trap of overlooking this discussion. Failing to have a clear dispute-resolution strategy can result in lengthy and costly legal battles.
Shareholder disputes can spell disaster for any business. By investing in a custom-fitted shareholder agreement that takes into account the specific needs and potential challenges of your company, you can significantly reduce the likelihood of conflicts arising. Remember, prevention is always better than cure. Take the time to address key considerations such as director appointments, minority shareholder protection, exit strategies, capital raising, business plan integration, and dispute resolution methods. By laying a solid foundation for your business relationships, you are setting yourself up for long-term success and minimizing the risk of costly legal battles.
Feel free to reach out for more information or to seek assistance in navigating shareholder disputes.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
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