Document the detail and minimise the risk

Wednesday 17 July 2002

International export markets provide a natural growth opportunity for successful family owned businesses operating in the domestic market.

The introduction of an outside shareholder with new capital, ideas and expertise may be critical to the long-term viability of your family business and its export venture. As the business owner, however, you may be legitimately concerned that your control of the business will be significantly diluted and that family aims and objectives may conflict with and be compromised by a new shareholder's investment objectives.

It is important to ensure from the outset that any new investor and their objectives "fit" with your objectives for the business. It is also important to consider from the outset the structure and scope of your new business relationship to minimise the risk of future misunderstandings. A new business relationship needs to be carefully considered, agreed on by both parties and documented usually in the form of a shareholders' agreement.

A shareholders' agreement is a private document (it is not available for search at the Companies Office) that records the key points of shareholding arrangements between two or more shareholders. Shareholders' agreements commonly address matters relating to company policy (such as dividend payments), management and the process by which a shareholder can exit their shareholding in the company. The scope and content of a shareholders' agreement can be tailored by your legal advisors to address your business' specific needs.

Some of the issues that you should consider when introducing a new shareholder into your family business include:

• Who will own what percentage of the company? Is the new investor to take a minority interest in the company, a 50% interest or a controlling interest? Are there to be any rights for the new investor to increase their stake (for example from 25% to 49%)?

• Who will be in control? How are management to be appointed and responsibilities to be delegated between the Board, the managing director and senior managers (who may be family members)? What protections do you have against being removed as an employee of the business in the future?

• How many directors will there be and who appoints them? Are those directors required to act in the best interests of the company or can they act in the interests of the shareholder who has appointed them (even if this is not in the best interests of the company)?

• How much money is to be contributed to the ongoing business by each of the shareholders? Will further capital requirements be met from shareholders (for example in the form of shareholder loans), or from new investors or financial institutions? On what basis will further investors be introduced into the company?

• Can the company's dividend policy be changed? Will all of the company's profits (or a certain percentage of those profits) be distributed to shareholders?

• What accounts and reports need to be prepared in addition to those currently prepared?

• To what extent can shareholders compete with the company? Does any shareholder already have an interest in a competitor company in New Zealand or overseas?

• What happens if a shareholder wants to sell their investment or if there is an irresolvable dispute? How will the parties determine the value of the shares to be sold? There are several exit options available to shareholders. You may wish to include put and call options. A put option enables a shareholder to require another person to purchase their shares at a certain price, or based on a formula, on a given date. A call option is the reverse. Such a mechanism could be helpful if you want to retain long-term control by having the right, and obligation, to buy back an outside shareholder's interest.

By carefully considering, planning, agreeing and documenting the scope of your relationship you can address the concerns that you may have in introducing a new shareholder into your family business. Such an approach should minimise the risk of an untimely and difficult stand-off or even break-up.