Businesses collaborate in various ways to create synergies in pursuit of common goals.
Collaborations in the form of joint ventures, franchises, partnerships and agency are done to define the common objectives of the project and obligations of each party.
The world of business has moved from being competitive to collaborative across and along the value chain.
The collaboration agreements regulate the way in which resources and operations of two or more businesses are aligned to create products and services that meet market needs.
Collaboration agreements are more useful to management as they regulate roles of each entity.
The need to maintain separate identity whenever businesses collaborate calls for a shareholders’ agreement which outlines investors’ relationships.
The need for shareholders agreements
A shareholders’ agreement helps bridge the gap whenever collaborations are done in that investors should consider the involvement of each entity and evaluate the manner in which profits and losses are distributed.
Parties to a collaboration agreement have different governance frameworks and policies hence the need to create a shareholders’ agreement which speaks specifically to the governance of the joint venture, franchise, partnership and/or agency.
The agreement brings shareholders close to objectives and benefits of collaborations agreed to by directors and will go a long way in reducing disputes between various entities.
Certain collaborations may operate as a new establishment or company with each party contributing to the resourcing of the entity.
Key issues addressed by shareholders agreements
A shareholders’ agreement is a contract that should meet the basic tenets of a contract but should have certain clauses which are mandatory or key. The following are common clauses:
a) Share subscription
The contribution of each entity and/or shareholder should be classified accordingly e.g. Class A, B or C shares with certain rights attached to it depending on the role of each party. The percentage shareholding in the form of economic benefit and voting rights may also be varied based on the nature of contribution and involvement in running the entity. The anti-dilution policy may also be incorporated.
b) Management appointments
The parties to a collaboration may also define how executives are appointed and/or whether there is a need to have each party represented on the board and/or management. Qualifications and level of experience may be outlined in line with the nature of the joint venture, agency or partnership arrangement.
c) Dividend Policy
A dividend policy which is linked to the operations of the collaboration should be included. It should also speak to reserved matters such as shareholder loans and repayments where the joint venture and/or partnership would need additional funds from amongst the shareholders.
d) Shareholder undertakings
Shareholders should comply with provisions of the agreement and may also agree to delegate voting rights to directors appointed to represent certain interests on the board. The clause would also regulate restraint to trade in the event of a shareholder pulling out of the arrangement.
e) Governing Law
The governing law becomes critical when parties are from various jurisdictions e.g. when a Zimbabwean entity goes into a partnership and/or joint venture arrangement with a South African or other foreign entity. Arbitration as well as international and/or regional commercial courts may be relevant for shareholder agreements. The nature of the business may also determine the best jurisdiction to be used. It is key for each party to the agreement to appreciate the law to be used in case of dispute.
f) Warranties
Parties collaborating on a project may guarantee continuity of the project regardless of certain limitations and/or circumstances. Warranties for each party to the contract may also be specified in relation to the contributions e.g. availing licences and related regulatory approvals. A tripartite mining collaboration for example may result in one party contributing its mining claims, with the other party providing equipment whilst a financing partner brings in working capital. Basically, each party should be free and legally authorised to partake in the collaboration.
Fungai Chimwamurombe is a registered legal practitioner and Senior Partner at Zenas Legal Practice and can be contacted for feedback at fungai@ zenaslegalpractice.com and WhatsApp 0772 997 889. Bhekimpilo Mangena is a Business Consultant at Zenas Consulting (Pvt) Ltd and can be contacted on 0712500490.
