A catering establishment can be run through several forms of operation. In some cases, the property owner is also the operator. In other cases, the property owner is only the lessor of the property, and the catering establishment is run by the lessee.
Sometimes another important role is played by a third party: that of the franchisor, who makes his (usually) successful formula available to the catering operator under a franchise agreement against payment of fixed and variable fees.
If the operator runs a catering formula under a franchise formula, it is important to have sufficient consultations and alignment with the lessor about possible obligations of the lessee under the franchise contract that may affect, for example, the leased property or its condition. If the franchise contract sets specific requirements the operator has to meet, the option should be examined in advance either to incorporate these requirements in the lease agreement – whether or not against payment of a fee to the lessor – or to make the operator responsible for certain hardware and software in the leased property. This may include IT systems or certain quality inventory items (‘Furniture, Fixtures and Equipment’).
However, what matters to operators it is not just external relations with a lessor or franchisor; the mutual arrangements between the shareholders of an operator are at least as important. Below we will give a brief overview of ten important and possibly useful points to consider when a shareholder relationship is started, renewed and/or terminated, which may be recorded either in articles of association or in a shareholders’ agreement.
1. Determining the form of collaboration
1.1. A shareholders’ agreement to be drafted may include a provision on change of control within a shareholder (if it is a legal entity). Such a ‘change of control provision’ will prevent the parties from being forced to operate in an undesirable collaborative venture.
2. Funding need of the company
2.1. In this context, it is important that the parties agree on the way the funding need of the company is given substance. Are the shareholders supposed to furnish capital, for instance through (subordinated) shareholders’ loans, or is it necessary to attract loan capital?
3. Board of the company
3.1. It is important to outline clearly (i) who will sit on the board of the operator and (ii) what rights, duties and powers board members have. The remuneration of the board (variable or otherwise) is an important factor. It may also be wise to include the condition that certain board resolutions will require an enhanced majority of the General Meeting.
4. Supervisory Board
4.1. In some cases, it may be useful or wise to install a Supervisory Board charged with supervising the policy conducted by the board of directors and the general course of affairs within the company. In that case, you will have to consider the size and composition of the Supervisory Board, and whether and which board decisions will be subject to the approval of the Supervisory Board.
5. The General Meeting
5.1. Especially if there is a minority interest, and it is relatively easy for the majority to pass influential resolutions at the General Meeting, it is wise considering the formulation of certain resolutions that may only be passed unanimously, or by an enhanced majority (for example by two-thirds of the votes). As a rule, these will be resolutions pertaining to dissolution, merger or division, the issue of shares, or amendments to the articles of articles of association.
5.2. It may also happen that the shareholders in a company with a 50/50 division of shares fail to reach agreement among themselves, which causes the votes to be equally divided and the motion to be rejected. It is possible to provide for such cases in advance, for example by appointing an advisor if this happens who will help bridge the difference of opinion, and whose advice will be binding.
6. Dividend policy
6.1. Especially with starting enterprises, where the cost precedes the benefit, it is important to save up for a rainy day rather than distribute all profits at once. This makes it important to give some serious thought to the dividend policy within the company: what percentage of the profits will be distributed to the shareholders, and what percentage is to be reserved for investments, or as a buffer for tougher times?
7. Drag or tag along
7.1. If there are several shareholders, it is useful to think through a sale scenario in advance. If one of the shareholders is offered a good bid for his shares, can this shareholder force the other shareholder(s) to join in the sale (on the same terms); the ‘drag along’? Or can a minority shareholder choose independently – regardless of the intention of the selling shareholder – to join the sale in a sale scenario; the ‘tag along’?
7.2. In either case, it should be set out properly how the price-setting is to be done and in what way potential differences of opinion on valuations will be resolved.
8. Non-competition and non-solicitation clause
8.1. If the collaboration ends at some point and one shareholder leaves the company, it is usually not desirable that this shareholder can start serving suppliers and customers of the catering establishment by himself; at least not within a certain period of time and a certain defined geographical territory. This makes it important to set out solid terms, also in light of competition rules.
9. Term and ending of mutual arrangements
9.1. Unexpected things always happen unexpectedly. It is a good thing to consider theoretical scenarios of which we hope they will never come true. Examples are the long-term illness of a shareholder and/or director, or their death (when heirs will enter the scene); the bankruptcy of the company, or even a scenario where one shareholder commits breach of contract or an unlawful act vis-à-vis another shareholder.
10. Conclusion
10.1. Finally, when certain arrangements are made with potentially large consequences if they are breached, it is important to have the big stick ready. You may do so by including a (sufficiently deterrent) penalty clause, or by granting a minority shareholder the right in specific cases to start inquiry proceedings before the Enterprise Section of the Court.
Hopefully, the points of attention described have given you some inspiration for the recording of arrangements between shareholders among themselves. The failure to record internal arrangements properly may have large consequences, even after a long time. Therefore you should seek good and timely advice from Frans Langerak.
