Starting a business involves significant pitfalls, one of which is properly setting up the memorandum of association. What should it contain so that it is drafted well from the very beginning, and comprises everything it needs and at the same time prevents conflicts and disagreements between the shareholders?
The memorandum of association: key aspects of shareholder cooperation
The correct set-up of the memorandum of association (or statutes in the case of a joint stock company or European Company) is the basis for long-term and successful cooperation between shareholders in corporations. It is a document that not only formally establishes the company, but above all sets the rules of the game for its operation and cooperation between the shareholders. Already at this stage, it is necessary to consider what share each shareholder will have and what their rights and obligations will be.
Honesty as the absolute basis for cooperation
One of the biggest mistakes when setting up a company is the lack of reflection on the value of the individual shareholders to the business itself. Each shareholder is usually well aware of their own value, but is in a more difficult position to assess the value of the other shareholders. Everyone perceives their own value as higher and underestimates the efforts, value and activities of others. Figures often get distorted as was evidenced e.g. in a research in Germany, which asked spouses who does more housework (expressed as a percentage), showing the average sum of housework in excess of 150%, which is logically impossible.
The question is: what is the key recommendation? Be as honest as possible with yourself and with others. Discuss openly the contribution of each shareholder to the company and try to objectively evaluate everyone’s role and their value to the business. Incorrectly set shares can later trigger conflicts that can have a destructive impact on the functioning of the company.
Avoid deadlocks
It is quite common but often inappropriate to split the shares 50/50 between two shareholders. Although this option may seem fair at the outset – very often shareholders choose this option precisely because they are unable or unwilling to determine which of them has higher value – in the event of a dispute, the company may be left deadlocked and the ability to make decisions will be paralysed. We therefore recommend setting up the shares so that there is always a casting vote, whether in the hands of one shareholder or through some other mechanism, which may vary depending on the situation. This can minimise the risk of deadlocks.
What should the memorandum of association or statutes contain, among other things?
1. Appropriate distribution of shares and capital contributions:
What shares will individual shareholders have and what will be their capital contributions?
It is also worth noting that it is possible to lay down various types of shares or stocks, allowing for greater flexibility and more options reflecting the distribution of power and the contributions of individual shareholders, although this may make initial discussions more challenging.
Finally, it is useful to define the possible transfer of shares in the future.
2. Shareholder’s rights and obligations:
Clearly specify which shareholder will be responsible for which business areas and what their key decision-making rights will be.
3. Dispute resolution mechanisms:
How will you proceed in the event of a disagreement? Include rules for mediation, arbitration or other mechanisms to resolve potential disputes.
4. Profit distribution rules:
How will the profit be distributed among the shareholders? Will there be an objective mechanism regarding the amount of share of profits? Will the entire profit be distributed or will the company retain most or all of the profit for its further development (especially at the early stages of the business)?
5. Shareholder exit:
What conditions will apply if a shareholder decides to exit the company?
Conclusion
The memorandum of association and statutes are not only formal documents, but above all instruments that can contribute to the long-term stability of the company. If set up correctly, they can prevent conflicts and ensure efficient operation of the company.
At HAVEL & PARTNERS, we have extensive experience with these topics and will be happy to assist you in setting up these key documents appropriately.
