I interact with so many people on so many levels and as such I get to engage in topical discussions often. Recently there was someone who was seeking some guidance regarding some business arrangement that they are currently in. Long story short it entailed a shareholding scenario. They have an idea and the expertise but no capital. The other prospective partner has the capital. Their question was on how they can split the shares. That got me thinking that I ought to do an article on the dynamics of shareholding in businesses.
A shareholder is simply one who owns shares of stock in a corporation or business. It is implied by the word itself i.e. ‘share’ and ‘holder’ meaning one who holds shares. A shareholder can be an individual, group of individuals, or even another business or corporation. The catch in shareholding is usually in getting monetary compensation in the form of dividends from time to time. Dividend refers to a pro-rata payment of money by a company to its shareholders, usually made periodically, for instance, annually. The other catch is in that they assume voting rights plus they also become eligible to be voted to become part of the Board of Directors. This implies that being a shareholder does not automatically mean you can be on the Board of Directors.
The Point Of Departure
There are so many issues about shareholding or the running of a business in general. Some of the core issues of concern are what the overall strategy will be in rolling out the business. The other core issue will be that of financials. For instance, how much and what exactly will the respective people involved contribute. An interesting example is a scenario where two people want to partner for a business; one has capital and the other one has the skillset and experience to roll out the actual product. You would think that the money partner should be the majority shareholder. In principle, that is not necessarily the case. The person who originated the idea and will put in the core work is supposed to be the majority shareholder. This means at the very onset the context will determine how easy or difficult determining shareholding will be.
Some Of The Issues That Form The Foundation Of Shareholding
The things I am about to share here will help you know how to navigate the path to reaching a shareholder agreement. Especially if it is a new trajectory you might not be sure what to talk about and how to talk about it. Even when you do approach a business law or financial expert you would need to have explored what the core issues of discussion should be. Here are some of the areas you should revolve your deliberations around.
The Splitting Ratios
The proportions of how the shares will be split will be informed by several variables. One of them is obviously the number of shareholders involved. It is important to understand that the subsequent shares owned by individuals have a bearing on the decision-making mechanisms of the business. One of the stickiest issues is that of the different levels of controlling interests. For example, there are different types of resolutions – resolutions are inevitable in running businesses. Resolutions can be termed ordinary and special.
The former typically requires more than 50 per cent of those shareholders (or shares) who can vote. The latter would require 75 per cent for the resolution to be passed. It must be understood that there is an issue of a shareholder having what is termed significant control. Usually, a shareholder with at least 25 per cent shares has significant control and can veto decisions. It is vital to bear all these dynamics in mind when trying to establish how many shareholders there should be and how many shares they must own.
The financials of any business are at the core of how well or not a business performs. Shareholding is central to how the financial aspects are handled. I know of a particular Zimbabwean company that I will use as an example. In that company, there is a shareholder who if they develop a dislike for any employee, no matter how childish it might be, can get them fired. In some cases, they can even give directives for the respective employee’s salary to be slashed. This goes to show you how shareholding if not properly handled can affect the business. Buying, selling, and or transferring shares can have implications on the performance of a business. Mergers and acquisitions are also closely tied to the shareholding dynamics of a business. Decisions on taking loans, giving surety, buying or disposing of assets and so on – these are tied into shareholding. These are some of the areas that must have comprehensive clauses detailed in the shareholding agreement.
In business, there will come a time when putting a shareholder agreement becomes inevitable. For some business, they might even have to start with such an agreement in place. When that time comes it will be important to bear all this in mind. Never settle for verbal agreements; enlist the services of professionals e.g. business law experts to help you draft such agreements. Shareholder agreements are not just about who gets how many shares; it also extends to how decision-making in daily operations will be done.
The subject of shareholding is a lengthy one and this article was just introductory. In future articles, I will zone in specific areas or even specific scenarios and detail how best they can be handled. Which specific areas of concern do you think you need more information on regarding shareholding? Please kindly indicate in the comments below.