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Shareholder agreements in Sydney and why you need one now.

Lots can go wrong between company shareholders. Take a quick look at these horror stories and call our shareholder agreement lawyer Leigh Adams to make sure you and your business do not become the next statistic.

They show that good shareholder agreements need to have insurance funded entry and exit provisions. Sometimes they are called buy-sell agreements. Have a good read and if you do not have such an agreement in place, ask yourself: “Do I feel lucky?”

This is real

John, Michael and Adrian are the principals of an established and successful construction business. John, who has a wife and three young children, is tragically killed in a motor vehicle accident. Contrary to the advice given by their advisors at the time the business commenced, the principals do not have a Shareholders Agreement with supporting life insurance policies in place. At the time, they didn’t think the cost was warranted.

For the years prior to John’s death, the construction business had been applying most of its profits towards funding the expansion of its operations and whilst the business is very successful, neither the business nor the principals have large reserves of cash.

John’s interest in the business has been valued at $1,000,000, and his widow, Jill (who is a full time mother), desperately needs this money to support herself and her three young children.

John’s death could not have come at a worse time and neither the business, nor Michael and Adrian, can raise the $1,000,000 required to pay Jill the value of John’s interest in the business. Accordingly, Jill has no alternative but for John’s estate to sue the business in order to force the business to arrange for John’s estate to be paid the value of John’s interest.

The ensuing court case cost Jill all of her accumulated savings and, although she won the case and the business was ordered to pay John’s estate $1,000,000 plus costs, it resulted in the business becoming insolvent. The outcome was that the business (or what was left of it) had to be sold. After paying the liquidator’s costs and repaying loans due to the secured creditors from whom the business had borrowed money to fund its expansion, there was nothing left to pay the $1,000,000 owed to John’s estate or to pay a return to Michael and Adrian for all their years of work in the business.

In order to survive, Jill had to sell her home, move herself and her three young children in with her parents and get a full time job.

This terrible outcome could have easily been avoided if John, Michael and Adrian had taken prudent advice from Leigh Adams Business Lawyers at the time they formed the business, and put in place a Shareholders Agreement with insurance-funded entry and exit provisions. If this advice had been taken, when John died:

  • Insurance proceeds would have enabled John’s estate to have been paid the value of his interest in the business within a few weeks of his death, and Michael and Adrian would have acquired John’s interest in the business.
  • Jill would have been able to keep her home and continue to be a full time mother to her children.
  • The business would have continued to prosper and been able to achieve the long term goals of its principals notwithstanding the death of one of the principals; and
  • The untimely death of John would not have resulted in the collapse of the business and the impoverishment of John’s family. 

Phillip and Phillipa

Phillip and Phillipa are 50/50 business partners in a thriving IT business. Phillip has a knack of getting the customers in the door, and Phillipa had initially written the software and for the past few years, has been writing all its upgrades. She has created a terrific product.

The business has grown substantially over the years and Phillip and Phillipa decide to roll over their interests in the partnership to form a company using the new July 2016 CGT roll-over provisions. They are equal shareholders in the new structure and have enormous trust and confidence in each other because they have been working together for over 20 years. They decide they don’t need to document their arrangement.

Tragically, Phillipa got breast cancer two years ago. Whilst things looked OK for a while, the recent surgery went terribly wrong, leaving Phillipa permanently and totally disabled. She is totally unfit for any form of work at all.

Phillip obtained a valuation of Phillipa’s shares in the company. Her shares are worth $700,000. He said to Phillipa’s husband (Peter) that Phillip would need five years to pay Peter the value of Phillipa’s shares.

Peter would have no part of the buyout. As Phillipa was the main bread winner for the family, Peter needed the income generated by Phillipa’s half ownership of the business to make ends meet.

But Phillip could not do Phillipa’s work in the business as well as his own work. In any event, he resented having to pay Peter when Phillipa was not around to pull her weight. What’s more, the business was not doing nearly as well after Phillipa’s surgery because he had to get in a manager to create the software upgrades that Phillipa used to create. The manager was not working out and customers were being lost.

Phillip had an idea. He decided to incorporate a new company with the same name. It had a new ABN and a new ACN and a new bank account. He wrote to all the customers of the business under the new letterhead informing them of the new bank account. After 8 weeks all the customers had migrated to the new company. It was not hard. They really did not care if the bank account had changed. They were still dealing with Phillip and they thought that nothing had really changed.

But Peter found out that everything had changed. Phillipa’s shares in the original company were now worth nothing because the original company was no longer trading. And even though what Phillip did was quite unlawful, Peter had no money to go to Court and seek his rightful redress.

If only Phillip and Phillipa had seen Leigh Adams Business Lawyers to draft their shareholder agreement.

The shareholder agreements that shareholder lawyer Leigh Adams prepares typically have 11 exit events (not just the two mentioned in this short article). They have ATO approval (ATO product ruling 2010/18) and there are other benefits:

  • There are no capital gains tax problems;
  • There are no goodwill problems;
  • There are no valuation problems;
  • There are no payment due date problems;
  • It has provisions to deal with insurance to cover death, disability and trauma events; and
  • They are simple and easy to use.

Call us for peace of mind today. If you want to protect your most valuable asset – your business – then be in touch. Our North Sydney shareholder agreement lawyer Leigh Adams is waiting for your call on 02 99640022 or your email on: enquiries@lalawyers.com.au.

 

Leigh Adams Business Lawyers North Sydney

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