Establish A Strong Foundation

Establish A Strong Foundation

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You are guaranteed to have at least one commonality with Elon Musk, Steve Jobs or Bill Gates — business partnership blunders.

In fact, Mark Zuckerberg was sued for $65 million by the Winklevos brothers for allegedly co-founding Facebook. Many business owners identify with disagreements that arise as a result of some sort of equity sharing arrangement relating to money, performance or even meddling spouses.

Ongoing disputes may result in a breakdown in trust, loss of customers and income, and the eventual demise of a business.

Some disputes are more serious than others, and can have a direct negative impact on business performance — such as refusal to sign suretyship to raise working capital finance; disagreement over strategy, vision or values; poor performance and work ethic; conflict of interest; or bad financial management.

Related: Owning A Franchise – Good Idea Or Bad Idea?

Disputes can arise for any given reason. Sometimes, if managed correctly or cultivated properly, conflict may result in creativity and innovation.

How do you Prevent Shareholder Disputes?

Build a strong foundation by establishing clear boundaries at the very beginning of your business relationship. Duties, powers and obligations of shareholders and directors need to be clearly outlined and agreed upon. The best way to do this is to research typical situations that may give rise to conflict and establish a legal framework and guidelines to resolve conflicts.

Here are a few ideas on how to establish policies:

1. Scenario planning

Consider how the shareholder relationship may be impacted if the business is confronted with various negative and positive scenarios, such as rapid growth, or a working capital funding crisis or financial loss. On considering these scenarios, mitigate your risk by establishing ‘how to’ policies.

Examples of possible scenarios may include breach of various duties, lack of support or varying vision of   the company’s strategy and management, disagreement with dividend policies, disparities between salaries, separate business interests, failure to provide financial, accounting and statutory information, exclusion from meetings and breaches of shareholders agreements.

Related: 3 Secrets To Franchising Success

2. Know the law

The Companies Act 71 of 2008 (Companies Act) sets out the powers and limitations of shareholders and directors. The Companies Act provides guidance on shareholder meetings, proxies or resolutions, among various other provisions. Applying the law ensures compliance, knowledge of rights and duties, and assists with preventing and resolving disputes.

3. Corporate governance

Learn international best practice on corporate governance and adopt the King Code guidelines from the get-go.

The following are a few tips on how to establish simple corporate governance in an SME:

  • Create simple internal policies, such as a code of conduct that clearly sets out duty of care, skill and diligence
  • Demonstrate effective leadership, characterised by ethical values of responsibility, accountability, fairness and transparency
  • Separate roles and responsibilities of the shareholder, director and manager to limit liability and ensure effective division of labour and function
  • Consider creating a small board of directors if you are a company, or implement a management structure.

4. Document all terms and rules of engagement

Documenting includes executing valid and legitimate agreements such as a user-friendly Memorandum of Incorporation (MOI) (mandatory), Shareholders Agreement (optional but recommended), Management Contracts or Letter and Terms of Appointment as Director or Memorandums of Understanding.

Related: Disputes Can Arise In Any Relationship And Franchising Is No Exception

Each of these agreements will establish the precise rules of engagement with clear boundaries on what is permitted and what is not, and more importantly how to resolve disputes as an alternative to approaching the courts.

By following these basic guidelines you will hopefully be able to prevent any shareholder disputes before they happen.

In our next article we will look at further provisions that could help you avoid disputes, as well as ways to resolve a dispute should one occur.

Monisha Prem
Monisha is a corporate advisor, admitted attorney at M. Prem Inc, and author with over 14 years deal-making experience. Monisha litigated for several years before joining an investment banking firm specialising in mergers and acquisitions. Monisha has owned and operated several businesses, is passionate about business development, commercial and corporate law.