What do you do if there are new shareholders?

Your business is doing really well and growing. You and your partners want to bring more people on board. There are other people that want to invest in your business and be a part of your company.

Firstly, you and your business partners should consider whether giving up a slice of your company pie is what you actually want to do. Do you want someone else to own a part of your business? Do each of the business partners want to give away equity?

This first consideration will depend on a lot of things like:

  • What is the new person bringing to the business? Do they have money they want to invest or do they have a particular skill your business needs?

  • What will the new ownership structure look like? Will they be a shareholder only or a director as well?

  • Does a new owner change the way the company makes decisions - e.g. for special majority (>75% of votes)?

  • Does the company have any loan agreements in place that prevent it from bringing on a new shareholder or outside investment without the approval of the lender?

Are you getting another shareholder because the company is running out of money? Is cash-flow low?

Business owners should bear in mind that there are other ways of getting money into the company. If cash flow is an issue, you don’t necessarily need to give up owning a part of the company. For example, instead of giving away shares / equity, a company can get money by:

  • Existing owners chipping in more money - this is usually done based on the number of shares a shareholder owns.

  • Getting a business loan from a bank or other financial institution - there are lots of banks out there that will extend business loans to businesses (even small businesses). The banks will usually ask for a personal guarantee from the directors of the company and might ask for security over the business itself (e.g. through registration of a security interest on the PPSR, discussed here)

  • Commercial loans - companies or individuals can lend to other companies. There will usually be a loan agreement, and again the lender will probably want to get a security interest over the company. At the moment, commercial lending (i.e. between companies) is largely unregulated, meaning that it depends entirely on the contract (loan agreement) between the borrower and the lender. It is usually only a good idea to do this with some serious legal advice, and with a pretty hardcore loan agreement to make sure everyone’s interests are protected.

  • Peer to peer lending platforms like Rate Setter, Marketlend, Thin Cats, TruePillars and others.

Once the owners of a business have decided that they want to bring on another shareholder, there are a couple of ways to go about this.

Option A - Issue New Shares

  1. The issue of new shares will probably require a certain number of directors or shareholders to agree to the issue - have a look at the decision-making powers under your shareholder agreement.
  2. Issuing new shares will mean that the existing shareholders will be ‘diluted’ - that is their ownership of the business pie will decrease.
  3. It is a good idea to get a new shareholder to sign a Deed of Accession - signing this document means that they agree to be bound to the Shareholder Agreement that is already in place, and that they will obtain the rights and fulfil the obligations set out in the Shareholder Agreement. Our Simple Shareholder Agreement helpfully includes a template Deed of Accession which new shareholders can sign at Schedule 5.
  4. If the new shareholder doesn’t agree with certain terms in the Shareholder Agreement, or they want some changes, then the existing Shareholder Agreement might have to be renegotiated between all shareholders. This is common where the new shareholder invests a large amount of money into the company, and buy up a large amount of equity (gets a good slice of the business pie).

Option B - Existing Shareholder Transferring Shares

  1. If an owner wants to exit the business, he can sell his shares to an external party. There may be a right of first refusal, where the exiting owner has to offer his shares to the existing shareholders first before he can sell them to a third party.
  2. There is usually a Share Sale Agreement or a Share Purchase Agreement between the seller of the shares (exiting owner) and the buyer (new owner) which deals with the legal transfer of the shares, price, warranties etc.

  3. It is a good idea to get a new shareholder to sign a Deed of Accession - signing this document means that they agree to be bound to the Shareholder Agreement that is already in place, and that they will obtain the rights and fulfil the obligations set out in the Shareholder Agreement. Our Simple Shareholder Agreement helpfully includes a template Deed of Accession which new shareholders can sign at Schedule 5.

  4. If the new shareholder doesn’t agree with certain terms in the Shareholder Agreement, or they want some changes, then the existing Shareholder Agreement might have to be renegotiated between all shareholders. This is common where the new shareholder invests a large amount of money into the company, and buy up a large amount of equity (gets a good slice of the business pie).

How have you handled new shareholders coming into the business? Has the transition been hard or pretty seamless? I am keen to hear your answers in the comments below. What has worked and what hasn't?