There are several types of businesses that can be formed and operated on a small scale. The venture could be a closed corporation with a membership of up to ten members or a private company. There are different legal requirements governing the formation and management of these business entities.
Dot the “I’s” and cross all the “T’s”
No matter what kind of entity the venture is, it’s essential that you sign a shareholders agreement when the business is set up. At the start of any new venture, each person assumes that other person has similar values and ideas, but when things go wrong they quickly realise that they cannot work together.
A legal arrangement, can provide a simple way to protect the interests of partners and shareholders
A partnership can be an effective method of pooling resources and skills to the financial advantage of all concerned. However, it brings with it responsibilities and the possibility of financial burden. “If you seek legal advice and have an agreement drawn up where you can negotiate minority protection in the agreement you will be able to safe-guard your risk,” advises Georg Kahle, Bowman Gilfillan Attorneys.
“The agreement will spell out what your rights are as a small shareholder,” says Kahle.
“Some minority protections are contained in the law of the country. If you enter into an agreement with the fellow shareholders in order to regulate your dealings with one another, you will be protecting your interests as a minority shareholder. One of the pitfalls of being a minority shareholder is the danger of having your shareholding diluted by a further issue of shares by the company”, says Kahle
Value of shares must be properly defined in the agreement
When the company’s shares are sold within the ranks of the shareholders, the issue of share value becomes extremely important. The company may decide to share the profits in the form of dividend payments and as the company grows in value, the value of the shares should grow as well.
Therefore, the shareholders agreement will specify how often dividends will be paid and how their value will be determined (e.g., as a percentage of net profits). The agreement should say when they are not to be paid – such as when working capital is required and the dividends are paid back into the business and not to the shareholders.
Determining the value of a company in the shareholders agreement
There are many different methods of valuing a company. The method of valuation must be decided at the beginning as it can save litigation and disagreements later. A “Valuation of Shares” clause can be included into an agreement to set out the process by which the fair market value of the shares can be agreed to in the event that the shareholders cannot agree.
First Refusal clause should be included in a Shareholder Agreement.
Shareholders of start up company should enter into a Right of First Refusal Agreement requiring shareholders to give the company or the other shareholders the priority right to match any offers to buy shares in the company. This provision means that when an offer is received from a third party, a shareholder must allow the other shareholders right of first refusal to purchase his or her shares before selling them to the third party.