Getting ownership sorted pays off (Pharmacy Today – February 2011)

Question:

I am running a pharmacy with a business partner and we are considering bringing a colleague in on the business. Is it an advantage to have a constitution or shareholders agreement?

Answer:

Yes, and it is possible to adopt either a constitution or shareholders’ agreement when the company is already in operation. Using pharmacy specialist lawyers and accountants can certainly help with the process, as the rules governing pharmacy ownership present a special set of challenges and opportunities. The best possible thing is to get the paperwork regarding an ownership structure sorted at the outset.

It is often easy to forget about the constitutional structure of the company while you focus on the “real” day-today- running of your pharmacy. Unfortunately, this is likely to make solving problems down the track more difficult and frequently more expensive.

Many pharmacies are owned by more than one owner. Joint ownership of any business has several advantages – in pharmacy the advantages are more pronounced as the business always needs to have a qualified pharmacist on site. Sharing the ownership of the pharmacy with another pharmacist is one way of ensuring the owners are able to take a break from the day-to-day running of the pharmacy every now and then. There is also the obvious benefit that capital can be shared to help cover the purchase price of what can be a very valuable business.

To deal with the many situations where things do not go exactly to plan, it is a good idea to prepare a constitution and a shareholders’ agreement prior to beginning the business venture. Disputes can arise for a number of reasons – we have seen shareholders disagree because their business has been too successful, causing arguments over who is entitled to the money! Other situations where problems have been caused that could have been prevented are discussed below.

Dealing with an existing shareholder

Can the shareholder sell to anybody? If rights are to be given to the other shareholder to purchase the shares, what is the price to be paid? How long will the shareholder have to pay? If this is not dealt with upfront, the shareholders may find themselves in a business relationship with people they would not, under normal circumstances, enter into business with.

Dealing with unequal financial contributions

It is relatively common for companies to be formed where one of the shareholders provides the finance and the other the labour or skills. In these cases it pays to define the value upfront of the shareholder’s “sweat equity”. Markhams has seen heated arguments about this subject!

In New Zealand, the Companies Act 1993 provides a default constitution for companies. However, most people will want to add to the rights and responsibilities that are included in the Companies Act. A constitution should details the rights and responsibilities of everybody associated with the company.

Shareholders will often also prepare a shareholders’ agreement. Unlike a constitution, a shareholders’ agreement is not lodged with the Companies Office and is, therefore, not publicly available. For this reason it may be preferable to include any details that may be confidential (such as a formula for sharing the profits of the company or for paying salaries to the owners).

What needs to be covered in a constitution or shareholders’ agreement?

Shareholders are free to negotiate whichever terms in the agreement they feel are important, as long as the provisions do not limit the rights and responsibilities prescribed in the Companies Act 1993.

Typically, a constitution will cover, at the minimum, the following items:

  • The minimum number of directors a company should have
  • Restrictions on share sales.

More private but equally important information that will often be included in the shareholders’ agreement includes:

  • How much share capital will need to be invested
  • A process for bringing in a new shareholder or transferring shares
  • A process for is something were to happen to any of the shareholders
  • Who can be a shareholder
  • Dividend payment policy
  • Key roles performed by shareholders
  • A process for resolving disputes.

It is easy to see why it is best to have a constitution and a shareholders’ agreement from the beginning as it means the thinking and negotiating has been done, covering a number of contingencies. Again, getting the right accountancy advice can save time and money in the long term.

Published in Pharmacy Today February 2011

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