Do we all know the rules? Why your business needs a stakeholders’ agreement

June 4, 2020

As new businesses start, the people involved usually share a common goal and tend to have few disagreements. As time goes by and viewpoints diverge, it can be hard for the business owners to deal with disagreements and disputes.

Partnerships often have a partnership agreement and companies have a constitution, but these documents do not adequately deal with many of the issues which arise between business owners.

That’s why Fox and Thomas recommends preparing a separate stakeholders’ agreement at the start of any business which has multiple owners, whether through a partnership, trust or company. This document can reduce the likelihood of disputes arising by agreeing key issues up front or forward planning how disagreements are to be managed in the most cost effective and least disruptive way if they do arise.

A stakeholders’ agreement can cover a wide range of issues including:

• how and when profits are distributed to the business owners;
• if the business requires extra funding in the future, how is this is to be done, for example: will the business borrow the funds; will the business owners be required to contribute the funds; will the business owners be required to give guarantees or provide security over their own property to support the funding for the business;
• how are disputes between business owners to be managed;
• what would happen on the death or incapacity of a business owner. Does the other business owner have the right to buy the share of the deceased or incapacitated business owner.  Does the estate of the deceased business owner have the right to remain in business with the surviving business owner;
• can additional owners be introduced into the business, and if so how;
• what business decisions are to be made by a majority of the business owners, and what decisions must be agreed on unanimously;
• are any of the business owners to be employed in the business and, if so, what are the terms of their employment; and
• what should happen if one business owner wishes to sell their interest in the business, e.g. do the continuing business owners have a right of first refusal, is there a mechanism for agreeing the sale price.

When a business relationship begins, the focus is often on the business itself. The process of preparing a stakeholders’ agreement at the beginning of the relationship provides the opportunity to deal with issues that may not have been considered so early on and at this point are often easier to negotiate and manage.

Like having an insurance policy, a stakeholders’ agreement is a document which hopefully will never need to be enforced, however if issues do arise between the business owners having the agreement in place can save all parties involved a lot of time, money and emotional energy.