Shareholders' or partners' agreement
The period of setting up a company is comparable to the seduction phase preceding a romantic relationship. The future seems promising, and you believe very strongly in the project and its partners. At this stage, the problems that could arise are either not perceived or overlooked. This blind phase should not obscure the fact that, as in a marriage, you make a commitment to your partners for better or for worse. As in any human relationship, there will be moments of euphoria. Differences of opinion can be stimulating, but they can sometimes paralyse the running of the company. The diversity of problems encountered in the life of the company must necessarily lead to the following question being asked: Am I prepared to accept the worst from my partners? If the answer is no, then we recommend that you draw up a partnership or shareholders' agreement, ideally with the help of a professional.
What is a shareholders' or partners' agreement?
A shareholders' or partners' agreement is a contract concluded between the partners or shareholders of a company with a view to organising relations between partners/shareholders and with third parties and to safeguarding their interests. The shareholders' or partners' agreement may also define the company's management procedures and mechanisms for preventing and resolving conflicts. The shareholders' or partners' agreement complements the company's articles of association. Unlike the articles of association, which are public documents, the shareholders' agreement is a private contract, which guarantees a degree of confidentiality.
When should a shareholders' or partners' agreement be signed?
Shareholders' or partners' agreements must be concluded in peacetime, because war is prepared in peacetime!
Ideally, the pact is concluded when relations between the partners are at their best and the partners have not yet invested too much of their time, money and emotions in their project. While it is true that time, emotional and financial investment are conducive to success in times of peace, they can be devastating in times of crisis, especially when there are major interests at stake.
The most common grounds for conflict between partners
The causes of conflicts between partners are varied, but generally include :
- Financial issues
When the contributions of the co-founders are of different kinds, the valuation of the contributions can give rise to a great deal of discussion, tension and conflict.
After raising funds, some partners who had invested with little or no remuneration may be inclined to claim salaries, while others see the new influx of funds as an opportunity to develop the product or open up new markets.
Dividend distribution often causes frustration among unpaid shareholders when dividends are not distributed while shareholders receive remuneration.
- Allocation, transfer and acquisition of new shares
The way in which shares are valued, changes in capital and the entry and/or exit of shareholders affect the balance of shareholders' rights and powers. It is therefore important to provide for mechanisms to mitigate certain imbalances. The shareholders' or partners' agreement may specify whether or not the fulfilment of certain conditions allows certain partners to increase their shares or voting rights.
- The working methods of some
The laziness of some, the lack of competence of others, mismanagement etc. can lead to terrible disputes between partners. Some who feel they are working harder and better than others may feel frustrated. Certain responsibilities may have been entrusted to a partner who turns out to be incompetent. After a while, a partner's skills may no longer be in line with the company's development. In these types of situations, it may be useful to provide for performance measurement mechanisms and whether individual or collective performance has an impact on access to additional shares, dividends or voting rights.
- Communication problems
In a company, as in a marriage, communication is a key element in building good relationships and fostering success. We have observed that a lack of transparency in the management and operation of a company leads to conflict and deadlock between partners/shareholders. It is therefore necessary to have a pact that sets out the content, methods and frequency of communication between partners.
- Power struggles
The way in which decisions are taken can create frustration and a feeling of abuse among minority shareholders. To reduce these imbalances, the shareholders' agreement can give more decision-making power to minority shareholders. The agreement can also define the procedures to be implemented to prevent and resolve conflicts between partners/shareholders.
- Factors external to the company
In small structures, the personal problems of partners often have repercussions on the company's performance (illness, family problems, etc.). The partners' agreement can stipulate how such situations are to be managed if they become structural.
Please do not hesitate to contact us for any further information.