Business ownership.
Shareholders agreements.
Articles of association
A solid foundation is needed to run a business smoothly. Most businesses can improve operations between shareholders, if they have an appropriate corporate foundation, an appropriate shareholders agreement, and suitable articles of association. The structure of an organisation can be made more solid for owners over time.
When a private company is formed, it is quite common for the founding memorandum and articles of association of the business to be prepared in a very simple format.
Furthermore, frequently there is no agreement between shareholders as to what happens in certain circumstances or in certain events in the future. The effects of this can include the following:
- the lack of an agreed approach to the valuation of minority interests or minority shareholdings,
- lack of agreement on what happens when the shareholders disagree on the fundamental direction of the business, or on fundamental policies,
- lack of suitable arrangements to break deadlocks,
- poor mechanisms for allowing for new investors into the company, for example which shareholder dilutes their shareholding,
- when a company is owned 50% each by two shareholders, what happens when one shareholder wants to sell, and the other shareholder does not wish to? The parties are deadlocked, and a buyer cannot get control of the business - so one shareholder's shares could be made virtually unsaleable.
It can be very useful to have shareholders agreement about such commercial matters, or at least processes set out to deal with such shareholder issues.
The one group of investors that pays most attention to such matters tends to be venture capital investors. This is because they know what is needed for growing a business, and what issues can arise that affect shareholders and their equity investments.
Most venture capital investors are interested in growing their investments successfully, and want to protect their investments. So they insist on prior agreement on suitable mechanisms to deal with decisions on, for example: -
- major capital investment,
- acquisitions,
- dilution of shareholdings,
- additional financing,
- granting of security,
- role of directors, and
- realisation of their investment.
Our view is that taking account of such matters at the outset in any organization can assist smoother operations, and can help owners achieve their objectives in the future.
Minority interests or minority shareholders can be affected in terms of value because: -
a) they lack voting control,
b) the minority shareholder cannot deliver full value to an investor,
c) usually, the rights attaching to a minority owner are not as strong as those held by majority shareholders,
d) minority shareholders tend to have less power on the board of directors,
e) minority discounts can be applied to their shareholdings (and such have been well accepted by the courts).
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www.battle.ie
Telephone:
+353 -1- 494 53 28.