By Ursula Hogben and Priscilla Ng

Many issues can arise when a company is set up with only two founders. Assuming that the founders will be equal shareholders, each will have one-half share, and each will be appointed a director and therefore have the same voting rights. This means that where there are disputes, decisions will be deadlocked until both founders can agree on a solution. Having certain clauses in your Shareholders Agreement can help avoid escalation of disputes and breakdown of the relationship.

Roles and obligations

To avoid disputes, the Shareholders Agreement should include a clear description of the roles and obligations of each founder. This will allow both founders to have a good idea of what their responsibilities are.

New shares

Any issuance of new shares should require unanimous approval. If a 50% majority can call for new shares to be issued, then the other shareholder runs the risk of having their stake in the company diluted significantly.

First right of refusal

A first right of refusal requires a shareholder who wishes to sell their shares to give notice to the other shareholder and provide him or her with an option to purchase those shares. This is particularly important where there are only two shareholders, as the selling shareholder could essentially be handing over half of your company to a completely unrelated third party.

Event of default

All Shareholders Agreement should have a clause which deals with any event of default. Events of default include situations where a shareholder becomes mentally incapable, is incapacitated, breaches duties under the Corporations Act, engages in conduct which brings the company into disrepute, etc.

Dispute resolution

As there are only two of you, it is important that disputes can be resolved in an efficient and effective manner. The Shareholders Agreement should set out the process of how disputes will be resolved, usually through mediation, negotiation or other alternative dispute resolution processes.

Termination and restraint

The Shareholders Agreement should deal with how and when the agreement between the founders will end. If one shareholder chooses to leave, it is important that there is also a clause to the effect that for a set period of time, the shareholder who has left the company will not, directly or indirectly, become involved with another entity which competes with the company, and not to canvass, solicit or entice away any clients, suppliers, agents, or representatives of the company.

Conclusion

Without a well-drafted shareholders agreement, if a dispute between the founders escalates to legal proceedings, more often than not, the only feasible option is to wind up the company. So before you and your business partner launch into setting up the company, put some thought into how you will work together and resolve disputes, and most importantly, speak to a business lawyer to discuss all your concerns!

Ursula Hogben

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