Risk of Establishing a company with friends
People are always full of hope when they are establishing a company with a friend. It can reduce the hardship by half and double the joy if it succeeds. When they bring their strengths and work on a business, synergies are created. They may be able to achieve greater success than when trying to tackle the venture alone. Of course, in some cases, it works out really well.
However, they often end up fighting with each other and cannot go ahead with the business. Not only does the business fail, but the friendship also becomes difficult to repair.
Establishing a company with your friend carries greater risk than making it alone. But this risk is always underestimated. If you really want to try it despite such risk, we recommend that you make a Shareholders Agreement.
The purpose of entering into a Shareholders Agreement is to avoid the worst-case scenario in which the relationship between the founders deteriorates and the company become unable to make decisions.
Suppose one of the founders has a falling out with another founder. If the founder resigns from the board but continue to hold shares in the company, the company would find it difficult to hold shareholders meetings to make decisions.
Conditions that must be stipulated in a Shareholders’ Agreement
There are two conditions that must be stipulated in a Shareholders Agreement.
The first is that if a founding member of the company loses his or her position as an executive of the company, he or she must assign his or her share to another founding member.
The second point is to stipulate the price at which shares are assigned in the above case. It is possible to set the price at market value. However, in the case of an unlisted company, it is difficult to calculate the transfer price. Therefore, it is often set at the price at which the shares were originally acquired by the shareholder who leaves the executive position.
What to Consider About Shareholder Agreements
How to avoid Deadlock
Even if you have a shareholders agreement in place, if you and your friend each own 50% of the company, you may find yourself in a deadlock, making it difficult to make decisions. The shareholders’ agreement may provide for a solution in the event of a deadlock.
However, such provisions do not always work, and if the shareholding ratios held by the shareholders are appropriately allocated in the first place, the deadlock itself can be avoided.
Ordinary Resolution at shareholders meetings are made by a majority of the voting rights of the shareholders. So, to avoid deadlock, one of the founders should hold at least a majority of the shares.
In addition, under the Companies Act, some important matters can only be approved by a two-thirds majority of the shareholders. Therefore, it is advisable to hold two-thirds of the voting rights.
About Shareholders Meeting Please refer to the Article about “Shareholders Meeting in Japan ”
When to enter into a shareholders’ agreement
It is preferable to conclude the shareholders’ agreement in the early stages of establishing the company. Because once the relationship deteriorate, this agreement will be very hard to make.
For consultation about contracts with English Speaking Attorney, we recommend Ashita no Shishi Legal Office.