Business Entity Ownership Agreements

What types are there and why use them?

Commonly on the purchase of a Business the purchaser will use a form of business entity to structure the acquisition. Entity’s may include a Trust (fixed, discretionary or hybrid), a Company (a variety of forms exist), a Partnership or a mixture of these. 

The different types of entities are applied for different purposes depending on the nature of the purchaser, the nature of the business, taxation, succession, the associated risks of the proposed investment, the amounts involved and the longer term goals, to name a few.

Once an entity has been decided on then an important consideration is the relationship and management of the business owners on an ongoing basis.

The following agreements are used commonly:

The agreements have some similarities even though the types of entity areas are very different in nature. They should all outline what type of ownership each of the equity owners have ie types of units in a trust or the share class for shareholders etc and the quantum thereof.

The agreements then also should address succession ie what is the procedure in the event one owner desires to retire or sell or reduce their ownership stake. Often this situation includes an ability for the existing and ongoing owners to have a first right of refusal to acquire the existing owners equity as a proportion to their existing equity ratio. This can have the effect of tightly maintaining control by the existing owners. 

Alternatively the equity may require to be sold to a third party or even trigger the whole business itself being sold to liquidate the equity. The death or the permanent impairment of an owner where ownership is contingent on certain inputs/efforts by the owner need also be outlined in the agreement. 

A company shareholder agreement should outline clearly the rights of the share classes owned including voting, participation in dividends and return on investment on winding up/liquidation. 

Quite often the agreements will also outline a Restraint of Trade whereby the owners are restrained from having any interest (direct or indirect) in a competing business during their equity ownership and then for a qualifying period after they cease being an owner. 

The agreements should refer to day to day decision making whether it be by appointing a manager, a CEO, a board of directors or the like. This then raises the issue of what decisions should only be made by the owners and which of those decisions should be by way of unanimous decision only (ie issue of further equity that causes dilution of the existing holding, introduction of an new partner, large debt or capital acquisitions, a change of core business direction, ethical investments etc). 

The takeaway: In the event you are entering into any type of business entity then you should consider entering into an Owners Agreement which is drafted specifically with your personal goals and your business/ investment goals in mind. 

*This article does not constitute legal advice and provides general information only.

“Liability limited by a Scheme approved under the Professional Standards Legislation. This article does not constitute legal advice and provides general information only.”