This is the first of two articles dealing with the complexities often experienced at SMEs relating to shareholding and directorships. In this article we highlight some of the typical issues encountered. If you can relate to this, you must also read our second article titled “Six steps to resolving the issues impacting shareholders, directors and corporate governancer at SMEs”. Find it here.
Any review of the structure and methodology to be applied by shareholders of SMEs when appointing company directors, including themselves, should also focus on sound corporate governance, or the lack thereof, to be adhered to and exercised by such directors. More importantly, how do we deal with conflicts of interest, disgruntled shareholders/directors who are blocking growth and development.
This article will only deal with some of the issues impacting the shareholding and directorships of SMEs.
A follow-up article will deal with an approach to resolving it.
Contact us if you want to discuss your own, or your company’s circumstances and need advice.
1 Defining the problem
1.1 Friends and relatives
It is estimated that more than 750,000 SMEs registered as companies or CCs exist in South Africa, comprising a few persons, be it friends, associates or family, who came together to establish/operate a business. In most cases, all the participants are shareholders and also directors. They consider themselves as equals and no leadership structures evolve and vest – and no one pays much attention to this.
Initial relationships between these individuals always commence on a good footing and everyone is positive and keen to make a success of their endeavours.
Over time, however, it often happens that many of these relationships change; differences of opinion and arguments arise and remain unresolved. The individuals drift apart; some resign as directors and leave, while many find that they are unable to dispose of their equity interests as no one wants to buy a minority stake in an unlisted company, or the other shareholders are not interested or have no money.
Once these relationships have been damaged, it is difficult, if not impossible to agree to, design and establish mechanisms to restore the equilibrium. It is usually too late.
What often happens as well, is that both husband and wife become shareholders and directors of their business. Should their marriage wane and eventually lead to divorce, the emotional pressure of trying to unscramble the business operations where either the husband or wife leaves, will take its toll on the business.
1.2 BEE
A further complicated dimension arises when existing SMEs need to or want to bring a black empowerment partner on board to secure an attractive Black Economic Empowerment (“BEE”) rating for the business.
Wikipedia defines BEE as “Broad-based Black Economic Empowerment (B-BBEE) being an integration programme launched by the South African government to reconcile South Africans and address the inequalities of apartheid by attempting to compensate for land that was repossessed from Africans. It encourages businesses traditionally owned by whites to integrate black people in the workspace, support black businesses, and give back to poor black communities affected by land repossession. Businesses are awarded points which they can claim on a B-BBEE certificate which entitles them to a greater chance of obtaining government contracts.”
The BEE decision often creates tensions amongst the existing shareholders and/or directors. Often, for the first time, a clearer focus is placed on the dreams and aspirations of each of the participants, leading to differences of opinion and a potential breakdown of relationships.
Even worse is when the BEE partners, once onboard, exploit their majority ownership, eg appointing more directors, grant themselves salary increases and/or additional shares and take other actions that benefit themselves, leaving the minority shareholders in the lurch.
Arguments ensue and relationships deteriorate. The business suffers. To buy back the equity interests of the BEE partners is often not possible financially, and the original owners are at risk of losing everything.
This article only dealt with a few issues impacting the shareholding and directorships of SMEs.
A follow-up article titled Six steps to resolving the issues impacting shareholders, directors and corporate governancer at SMEs will deal with an approach that resolves it.
Contact us if you want to discuss your own, or your company’s circumstances and need advice.