Avoid the pitfall of bringing strangers into your business

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Ideas & Debate

Avoid the pitfall of bringing strangers into your business


Carol Musyoka

Summary

  • The shareholders’ agreement should cover in more detail than the articles of association how shares should be transferred apart from the death of a shareholder.
  • Preemptive rights are a standard way to protect existing shareholders from ending up sitting on the table with a Putin lookalike.
  • Doing business with other people is like a marriage. It starts with a honeymoon stage, until the war begins.

A young couple deeply in love are involved in a car accident, killing them instantly. They arrive in heaven and are welcomed by Saint Peter who welcomes them into the Kingdom of God.

“Wait,” the man said. “We were about to get married, but we died before the ceremony. Is it possible to get married in paradise?

Saint Peter tells them to wait and he will see what he can do. A few days later, Saint Pierre returns.

“Yoh! It was tough,” he said, “but I managed to throw a ceremony.” “Fantastic,” the couple said, “but can we also do a prenup, just in case?”

Saint Peter throws up his hands in frustration and says, “It’s taken me this long to find a pastor here, do you have any idea how long it will take me to find a lawyer?”

In case you missed my last two weekly columns, I focused on the business equivalent of a prenuptial agreement, called a shareholders’ agreement. People who choose to do business together should seriously consider hiring a good business attorney to set one up. Please note the careful reference to “good commercial lawyer”.

The lawyer who represented you and undertook the conveyancing process for this 50 x 100 piece of land in Kitengela does not automatically become a good commercial lawyer.

You want to see evidence from your proposed legal eagle of the work done advising companies in the areas of mergers, acquisitions, debt financing, corporate restructuring, joint ventures, etc. Such a lawyer will have experience in identifying potential pitfalls in the conduct of business and how parties should protect themselves when such pitfalls arise.

One of these traps is the sale of shares by a shareholder of the company. The shareholders’ agreement should cover in more detail than the articles of association how shares should be transferred apart from the death of a shareholder.

Preemptive rights are a standard way to protect existing shareholders from ending up sitting on the table with a Putin lookalike. A right of first refusal is the right of first refusal, which means that if Tom – who owns the company with Mary and Jane – wishes to sell his shares, he must first offer his shares to the two ladies before he can sell them to Juma . .

A preemption clause should state that the offer to sell must be made on a pro rata basis, which means that Mary and Jane have the right to buy the shares that will maintain the same level of share ownership between them.

So if Tom owns 50% of the existing shares, Mary has 30% while Jane has 20%, then Tom’s 50% will be split equally 30/20 between the two remaining shareholders.

This protects Mary and Jane from further dilution of their existing position while maintaining Mary’s superior position over Jane. Mary ends up with 60% while Jane ends up with 40% and Tom drives off into the sunset as a very happy camper.

Of course, the shareholders’ agreement must have a defined methodology for determining the value of the shares in the event of exercise of the preferential subscription right. This ensures that a fight does not break out when Tom chooses a valuation method that values ​​stocks beyond Mary and Jane’s reach since Juma, his proposed buyer, has deeper pockets.

So let’s say Mary and Jane can’t or won’t buy Tom’s stock. The shareholders’ agreement will therefore provide for the entry of a third-party buyer by sending a notice to the existing shareholders, when the right of pre-emption is not exercised.

The notice must indicate who the buyer is and that the buyer is required to sign a deed of adhesion accompanied by a non-competition clause. What does this rapidly depreciating Russian ruble mean? Tom wants to sell his shares to Juma and has entered into a share purchase agreement.

Juma must agree to be bound by the terms of the shareholders agreement that exists between Tom, Mary and Jane. And tied lock, stock and two barrels because Juma can’t choose the terms of the shareholders agreement he wants and doesn’t want.

The shareholder agreement will state that the company cannot register Juma as a shareholder until he has signed the deed of accession, which may also provide that Juma will not enter, undertake not or will not invest in another competing business to ensure that it does not use information obtained as a shareholder for the benefit of a competing business.

This deed of accession will then be considered as a single document with the existing shareholders’ agreement.

Doing business with other people is like a marriage. It starts with a honeymoon stage, until the war begins. Be wise. Protect yourself and your investment and obtain a shareholder agreement.

[email protected] Twitter: @carolmusyoka

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