Starting a business with a friend, colleague or business partner on a 50/50 basis can seem like the fairest possible arrangement.
You each contribute to the business. You each own half of the company. You make the important decisions together and, if the business succeeds, you share equally in that success.
When the relationship is good, a 50/50 company can work extremely well.
The difficulty arises when the two shareholders no longer agree.
What happens if one of you wants to expand and the other does not? What if one shareholder is working considerably harder than the other? What if one wants to take profits out of the company while the other wants to reinvest? What happens if one of you wants to leave, sell your shares or bring in an investor?
With two equal shareholders, neither may have sufficient voting power to impose a solution on the other.
That is why two people going into business 50/50 in Ireland should consider what will happen if they disagree before they establish the company or while their relationship remains good.
A properly drafted shareholders’ agreement can address many of these issues.
Here are five of the most important matters to agree.
“Everything will be 50/50” sounds straightforward.
In practice, however, a business needs to make decisions every day.
Who can hire employees? Who controls the bank account? Who negotiates with suppliers? Can either director sign a significant contract? Who determines salaries? What happens if the company wants to borrow money?
The shareholders should distinguish between day-to-day management decisions and major decisions that require the agreement of both owners.
A shareholders’ agreement can identify important reserved matters that require the approval of both 50% shareholders.
These might include:
There is a balance to be struck.
If too many ordinary decisions require unanimous agreement, running the company can become unnecessarily difficult. If too few decisions require joint approval, one shareholder may feel that important decisions are being made without them.
A good 50/50 shareholders’ agreement should therefore establish a practical division between normal management decisions and decisions that genuinely require the agreement of both owners.
This is one of the most common sources of tension between business partners.
At the beginning, both founders may expect to work full-time in the company.
Three years later, circumstances can be very different.
One shareholder may be working 60 hours a week while the other has reduced their involvement considerably.
One may be responsible for bringing in most of the company’s customers while the other is contributing less than originally anticipated.
However, they still own 50% of the company each.
This raises important questions that should ideally be addressed at the outset.
For example:
The last question is particularly important.
Owning 50% of a company and working for that company are not necessarily the same thing.
A founder may potentially cease being an employee or director while retaining a significant shareholding, depending on the company’s arrangements.
A shareholders’ agreement can include good leaver and bad leaver provisions dealing with circumstances in which a shareholder who leaves the business must offer their shares for sale and how those shares are to be valued.
Agreeing this while both founders are enthusiastic about the business is usually much easier than attempting to negotiate it after one person believes the other is no longer pulling their weight.
This may be the single most important issue for a 50/50 company.
If you each own half of the shares and have equal voting power, what happens when you reach a fundamental disagreement?
This is known as shareholder deadlock.
Deadlock might concern:
Neither shareholder necessarily has to be behaving unreasonably.
Two experienced businesspeople can simply have genuinely different views about what is best for the company.
But if neither can outvote the other, the company may be unable to move forward.
A deadlock clause in a shareholders’ agreement can establish what happens in this situation.
The procedure might initially require the shareholders to meet formally and attempt to resolve the disagreement.
If that fails, the agreement could provide for mediation.
Certain technical disputes might be referred to an independent accountant, valuer or other expert.
For a fundamental breakdown in the relationship, the agreement may ultimately contain a mechanism allowing one shareholder to buy the other shareholder’s shares.
There are different ways of structuring these provisions, and the consequences can be significant. Buy-sell mechanisms that appear fair in principle may operate very differently where one shareholder has considerably greater financial resources than the other.
The appropriate 50/50 shareholder deadlock clause should therefore be designed for the circumstances of the particular business and its owners.
The important point is to answer the difficult question at the outset:
If we fundamentally disagree and neither of us will change our position, how does this end?
People often establish companies believing they will remain in business together indefinitely.
Life does not always work that way.
Five or ten years later, one founder may want to retire, establish another business, move abroad or simply realise that they no longer want to work with their business partner.
If one shareholder wants to leave a 50/50 company, several difficult questions immediately arise.
Can they sell their shares?
Does the other shareholder have the first opportunity to buy them?
Can they sell their 50% interest to a complete stranger?
How will the shares be valued?
What if the remaining shareholder cannot afford to buy them?
What if both shareholders want to buy the other out?
These issues should be considered in the share transfer provisions of a shareholders’ agreement.
The agreement might contain pre-emption rights, requiring a shareholder who wishes to sell to offer their shares to the other shareholder before selling them to an outside purchaser.
However, simply providing a right to purchase is not always enough.
The agreement should also consider how the shares will be valued.
For a successful company, the difference between competing valuations can be substantial.
A clear shareholder exit and valuation mechanism can therefore become one of the most valuable parts of a shareholders’ agreement.
Many business partner disputes ultimately come down to money.
Two shareholders can agree completely about how to grow a company but have very different views about what should happen to the profits.
Imagine a company generating substantial profits.
One shareholder wants to reinvest everything for the next five years.
The other shareholder has different financial circumstances and wants the company to begin paying significant dividends.
Who decides?
The position can become even more contentious where both shareholders work in the company.
One might argue that they should receive a larger salary because they are generating more revenue. The other might argue that, as equal shareholders, they should receive equal economic benefits.
These issues should be discussed before they become personal.
A shareholders’ agreement can address principles concerning:
Additional funding deserves particular attention.
Suppose the company requires €200,000 to fund its next stage of growth.
Each 50% shareholder is asked to contribute €100,000.
One can afford to do so. The other cannot.
What happens next?
Can the first shareholder provide all the money? Is it a loan to the company? Can additional shares be issued? Could the other shareholder’s 50% interest ultimately be diluted?
These are much easier questions to address before the company needs the money.
There is no requirement that every company with two shareholders must have a shareholders’ agreement.
However, a shareholders’ agreement can be particularly important for a 50/50 company because neither shareholder necessarily has overall control.
Irish company law and the company’s constitution provide an important legal framework, but they will not necessarily provide a bespoke commercial solution for every disagreement that can arise between two equal business partners.
The Companies Act 2014 itself distinguishes between different voting thresholds for company decisions. Certain written resolutions require shareholders representing more than 50% of voting rights, while special resolutions require at least 75%, subject to the relevant statutory requirements. Two equal shareholders can therefore encounter obvious practical difficulties where neither can achieve the necessary majority without the other.
A shareholders’ agreement allows the founders to go considerably further and agree their own rules concerning management, reserved matters, share transfers, deadlock and exit.
Every company is different, but a shareholders’ agreement for two 50/50 shareholders should generally prompt consideration of matters including:
The objective is not to anticipate every argument the shareholders might ever have.
It is to agree a framework for resolving the issues that could otherwise threaten the business.
Trust is not a substitute for a shareholders’ agreement.
In fact, the best time to negotiate a shareholders’ agreement is generally when the founders trust each other and have a shared vision for the company.
A shareholders’ agreement is not an indication that you expect the relationship to fail.
It is an opportunity to have conversations that business partners should have anyway.
What do we each expect from this business?
How much are we prepared to invest?
How hard are we each expected to work?
When can we take money out?
Can either of us sell?
What happens if one of us wants to leave?
And, perhaps most importantly:
What happens if we stop agreeing?
If both founders can answer those questions before going into business together, they are in a much stronger position than founders attempting to answer them for the first time during a serious shareholder dispute.
It is not necessarily too late simply because the company has already been established.
Shareholders can consider putting an agreement in place after incorporation.
Indeed, the growth of the company can be a good reason to review the arrangements between the founders.
A business that was worth very little when two friends established it may, several years later, have employees, valuable intellectual property, significant revenues and substantial goodwill.
The financial consequences of a shareholder dispute have therefore changed considerably.
The important distinction is that putting an agreement in place while the relationship remains good is very different from trying to negotiate one after a 50/50 shareholder dispute has begun.
There is nothing inherently wrong with owning a company 50/50 with a business partner.
Many successful businesses operate on precisely that basis.
The risk arises when two equal shareholders have never agreed what should happen when their interests or opinions diverge.
Before going into business 50/50, make sure you have discussed at least these five issues:
1. Who makes which decisions?
2. What happens if one person stops contributing to the business?
3. How will you resolve a 50/50 deadlock?
4. What happens if one of you wants to leave or sell?
5. How will salaries, profits, funding and dividends be dealt with?
Those conversations may feel unnecessary when you are excited about starting a new business.
They can become extremely important several years later when the company is successful and valuable.
Sherwin O’Riordan Solicitors advises founders, business owners, directors and shareholders on shareholders’ agreements and shareholder disputes in Ireland.
We advise on the preparation and negotiation of shareholders’ agreements, including 50/50 shareholders’ agreements, deadlock clauses, reserved matters, share transfer provisions, pre-emption rights, shareholder exit provisions and share valuation mechanisms.
We also advise where the relationship between business partners has already broken down, including 50/50 shareholder deadlocks, founder disputes, shareholder buyouts and disputes concerning the management and control of Irish companies.
If you are going into business with a partner or already own a company on a 50/50 basis, obtaining advice at an early stage can help ensure that the arrangements between you are clear before problems arise.
If you would like advice on preparing or reviewing a shareholders’ agreement, contact Sherwin O’Riordan Solicitors to discuss your requirements.
Understand how compensation is assessed
Real examples of successful outcomes
If you would like an immediate call back to discuss any queries, just fill in your details below. All correspondence is treated as confidential.
