1. Changes in health or availability of key persons – Business interruption as a result of a death or disability of a business partner and/or key person can destroy a company quickly. Structuring for changes of health or availability of key persons requires consideration of whether the partners want to deal with the spouses and “others” of the unwell/deceased partner – and if not, how the partners plan to work through the event;
2. Requirements for funding operational costs and capital requirements – The source of ongoing funding requirements of a business are one of the most common sources of business breakdown. During the planning process, the objectives of the partners are hashed through. Some partners stipulate that additional capital requirements must be funded by the partners, whereas other partners only agree to commence operations on the basis that no further capital requirements are needed – dealing with either of these options requires discussion and detailing of terms of agreement to prevent business disruption;
3. Rules of operation and accountancy – A successful (or unsuccessful) business can be operated with a wide range of management mechanisms. This topic is one of the most critical in staging a viable enterprise, because it is vital that the partners understand and agree to the rules of engagement for staff, spending, development and long term objectives. We recommend a condition of all Shareholder Agreements is that a Financial Business Plan be developed (or at least consented to) each year of operation, and that the Business Plan provide the basis for approved operations and accountancy for each year. When all partners maintain an eye on such matters, they remain connected and agreeable to the “bigger picture”; and
4. Limitation or restriction on new Shareholders – Many partners start a business with a common thread – they like, or at least respect, each other. Something about the relationship from the start is determined to “work.” The partners, however, do not anticipate in many circumstances one of the other partners seeking to exit the business. It is critical that the rights and restrictions in terms of one partner selling out to a third party be considered. Some of the more common solutions include a mandatory first right of refusal to the existing partners and/or a “drag along” right that requires minority holders to “sell out” at a stage and/or “tag along” right that rights the seller to allow the others to participate in a sale on the same terms as the seller. The options relative to this restriction are quite broad, and the discussion of this topic needs to be considered. If done incorrectly, or not at all, the risk of a “minority oppression action” or “wind up” is very real.
Importantly, there is no such thing as an “off the shelf” Shareholder Agreement. If a Shareholder Agreement is not tailored to the business and its partners, the Agreement may result in an exacerbation of issues because one or more of the partners may argue lack of consideration or understanding and seek to have the entire Agreement set aside. Whilst there are threshold burdens of proof in such actions, the issue is that that without adequate discussion and consideration – evidence that all parties knowingly entered into the arrangement can be sufficiently lacking to prevent enforceability.
Nautilus’ legal professionals have a wide range of experience in negotiating and drafting simple to complex Shareholder Agreements, including terms of buy/sell, liaising with business insurance brokers for insurances and alike. We consult with clients across Queensland and New South Wales. If you require services outside of these jurisdictions, we can refer you to Firms which can assist you. We welcome you to contact our offices on (07) 5574 3560 or email info@nautiluslaw.com.au.
Thank you for considering Nautilus Law Group.
Submitted by Katrina Brown BA JD ATIA TEP SSA, Senior Commercial and Property Lawyer, Nautilus Law Group katrina@nautiluslaw.com.au
