The shareholder agreement should cover in greater detail than the articles of association how shares should be transferred outside of death of a shareholder.
Pre-emptive rights are a standard way of protecting existing shareholders from finding themselves sitting on the table with a Putin doppelganger.
Doing business with other people is like a marriage. It starts off with a honeymoon stage, until the war begins.
A young couple deeply in love is involved in a car crash, killing them instantly. They get to heaven and are greeted by Saint Peter who welcomes them into God's Kingdom.
"Wait," says the man. "We were about to be married, but we died before the ceremony. Is it possible to get a marriage in heaven?"
Saint Peter tells them to wait and he'll see what he can do. Days later, Saint Peter comes back.
"Yoh! It’s been tough," he said, "but I managed to arrange a ceremony." "Fantastic," says the couple, "but can we also get a prenuptial agreement, just in case?"
Saint Peter throws his hands up in the air in frustration and says, "It took me this long to find a pastor up here, do you have any idea how long it'll take me to find a lawyer?"
In case you’ve missed my last couple of weekly columns, I have been focusing on the business equivalent of a prenuptial agreement, which is referred to as the shareholder agreement. Individuals who choose to do business together should seriously consider getting a good commercial lawyer to craft one. Please note the careful reference to “good commercial lawyer”.
The lawyer who represented you and undertook the conveyancing process for that 50 by 100 plot in Kitengela does not automatically become a good commercial lawyer.
You want to see evidence, from your proposed legal eagle, of work done in advising businesses in areas of mergers, acquisitions, debt financing, corporate restructuring, joint ventures, etc. Such a lawyer will have experience in identifying potential pitfalls in doing business and how parties should protect themselves when such pitfalls emerge.
One such pitfall is the sale of shares by one shareholder in the business. The shareholder agreement should cover in greater detail than the articles of association how shares should be transferred outside of death of a shareholder.
Pre-emptive rights are a standard way of protecting existing shareholders from finding themselves sitting on the table with a Putin doppelganger. A pre-emptive right is the right of first refusal, meaning that if Tom — who owns the company with Mary and Jane — wishes to sell his shares, he has to offer his shares to the two ladies first before he can sell them to Juma.
A pre-emptive clause should state that the offer for sale should be on a pro-rata basis, meaning that Mary and Jane are entitled to buy the shares that will maintain the same level of shareholding amongst themselves.
So if Tom has 50 percent of the existing shares, Mary has 30 percent while Jane has 20 percent, then Tom’s 50 will be split in the same 30/20 way to the two remaining shareholders.
What this does is it protects Mary and Jane from any further dilution of their existing position while maintaining Mary’s superior position over Jane. Mary ends up with 60 percent while Jane ends up with 40 percent and Tom walks away into the sunset a very happy camper.
Of course, the shareholder agreement should have a defined methodology for determining the value of the shares in the event of a pre-emptive right exercise. This ensures a fight doesn’t break out when Tom chooses a valuation method that prices the shares out of reach for Mary and Jane since Juma, his proposed buyer, has deeper pockets.
So let’s say that Mary and Jane cannot or will not buy Tom’s shares. The shareholder agreement will therefore provide for the entry of a third party buyer through an issuance of a notice to existing shareholders, where the pre-emptive right is not taken up.
The notice should state who the buyer is, and that the buyer is required to sign a deed of adherence together with a non-compete clause. What the rapidly-depreciating-Russian-ruble does this mean? Tom wishes to sell his shares to Juma and has entered into a share purchase agreement.
Juma has to agree to be bound to the terms of the shareholder agreement that exists between Tom, Mary and Jane. And bound lock, stock and two barrels as Juma cannot cherry-pick which terms of the shareholder agreement he wants and doesn’t want.
The shareholder agreement will state that the company cannot register Juma as a shareholder until he signs the deed of adherence, which may also provide that Juma will not enter, undertake or invest in another competing business to ensure he doesn’t use the information obtained as a shareholder to benefit a competitor business.
That deed of adherence will then be considered as one document together with the existing shareholder agreement.
Doing business with other people is like a marriage. It starts off with a honeymoon stage, until the war begins. Be wise. Protect yourself and your investment and get a shareholder agreement in place.
