You have a great idea.  On your own you cannot make it happen.  When you bring in employees to help make the idea work one of the ways to incentivise them (particularly in the lean years at the start) can be to offer them some shareholding stake.  This post will point out three key topics that we think you should think through in advance.

1. What if things turn to custard?: Things are rosy at the start of a new venture and it can be tempting to think that everything will work out.  A few months or years later it may not be the same situation and someone who was brought in for a specific task as an employee may want out.  Or you may want them out.  If they exit as an employee then should they remain a shareholder?
2. How can you deal with this?:  It is best to think this through objectively at the start and provide for a clear mechanism in a shareholders’ agreement.  That way there will not be confusion and disagreements later on.  We would typically see that a shareholders’ agreement provide for one of the following scenarios:
   
   Good leaver: Depending on how long they have been involved with the venture, it may be appropriate for the employee to simply end their employment and retain their shareholding.  Situations may just have changed (health issues, partner with job somewhere else etc) but there is often no desire for them to also be forced to give up their shareholding when they stop being an employee.
   
   Underachieving employee: It is possible to build in a description of what individual shareholders who are to be employees will be expected to do in the business.  That way there are some criteria which can be used to determine if they are underachieving.  If they are, then there can be a mechanism to require them to sell their shares back to the Company or to the other Shareholders.  This means they will not be involved in the business either as employee or shareholder going forward.
   
   Bad leaver: This is a situation worse than an underachieving employee and can occur where a person has become disillusioned with their situation.  In this scenario it may be appropriate to build in the ability to repurchase the shares of the bad leaver but also build in a discount for the share price that is paid.
3. Why is all this so important?: The culture of your new start-up will be critical for it being a success.  One of the most common issues for a start-up can be how you deal with a situation where there is a disgruntled employee.  Without a clear mechanism in place it can be extremely difficult to come to an agreement on the way forward and whether they stay or go, remain as a shareholder or not.  That is why thinking this through in advance is so critical.  As the saying goes, “hope for the best, prepare for the worst.”

We hope this guidance is of use and will trigger some thoughts for you about this important issue.

We are lawyers who have just opened our new law office in Selwyn district, in Rolleston.  Why would lawyers come to Rolleston?  There are several reasons why we have made this choice:

1. 1. Filling a gap: right now most people need to drive in to Christchurch to see a lawyer.  We want to be more proactive and accessible to Rolleston residents by coming out to Rolleston.  Already the enthusiasm for this has surprised us and we are glad to offer a solution for people locally.
   2. A close connection for us: Several of our staff have close connections out in the Rolleston community with Steven Moe moving back from overseas and choosing to take his young family there (his children go to Rolleston School).  Paul Owens lives a short hop down the road in Prebbleton with his young family and other staff members live in Hornby and other locations in the area.   Having operated in Christchurch since 1948 we are glad to expand our horizons to Rolleston as well to meet the needs of the community.
   3. Growth and positive developments: Rolleston is growing in importance both in the Selwyn district and as a significant town located close to Christchurch.  With a bustling shopping centre, iZone business park, increasing number of subdivisions and ever growing primary schools (and don’t forget Rolleston College) it is certainly not the sleepy town you may remember of years ago.
   4. Community: Just attending the recent 150^th anniversary celebrations and seeing all the participants driving by in the parade, or going to the recent Fireworks at Foster Park where there were thousands of people enjoying the sinking ship slide, bouncy castles, merry go round etc you could see an energy and life and a real community spirit.  The earthquakes and displacement following them certainly gave Rolleston an unexpected boost to its numbers but with that new growth there seems to be a real sense of community since nearly everyone is “new” to the area so there are fewer preconceptions and “the way it is always been done” attitudes.
   5. The future: Anyone who spends time in Rolleston will easily tell that this is a town with a future and there will be a new generation coming through which call it their home.  We are glad to arrive and be part of the history of this town as it moves into the next stage of life and are excited about the opportunities for the residents of Selwyn whether they are in Rolleston, Lincoln, Darfield, Leeston, Prebbleton or beyond.

Our offices are at 80 Rolleston Drive. W To send us an enquiry write to Paul Owens (Partner) at paulowens@parryfield.com or Steven Moe (Senior Associate) at stevenmoe@parryfield.com or phone us on 03 348 8480.

The debate
We are lawyers.  Like many professions and other businesses we are watching a significant debate.  It’s like watching a tennis match sometimes.  In our particular legal world we are being warned about a coming tsunami of so called “New Law”.  In your business it will have some other title but it is the same thing essentially – the effect of new technology.  Artificial intelligence (doing legal opinions faster and better than any human), virtual offices (who needs expensive downtown real estate anyway?), internet based client relationships, and so on.

Over on the other side of the metaphorical tennis court, but looking more like a novice playing against Roger Federer, is the school still arguing that all these things are not the significant disruption that some are saying they will be.  Although usually acknowledging some of the significant developments that are occurring, this school warns against reacting too quickly or inappropriately and losing focus on your core business.  It tends to denounce the other new offerings as being inferior and claims that over time consumers will come back when that quality gap is more apparent.  We sympathise with this view because it is partly true and also because it’s comfortable. Change can be time consuming, costly and difficult and who really likes to change if things are going along smoothly enough?  So the “don’t rock the boat” approach has a strong appeal.

The problem
However there is a problem with this view that seems to put down the impact of New Law.   Consumer preferences shift more quickly now than ever before.  And even if you just focus harder on the things that you do really well you may be at risk from those who do it cheaper and disrupt your market by offering an alternative.  “Successful firms that are disrupted are not complacent or poorly managed. Instead, they continue on the path that brought them to success.”  (Joshua Gans, The Disruption Dilemma, 2016.)

The challenge
So the challenge is this.  How do we stop being just spectators, watching the tennis ball go back and forth, and, instead, stay in the game during all this apparent change that is coming?

What’s to stop my competitors or completely new players with their fancy digital marketing or online service taking my business share?

In case you think these are still just smug comments from the side lines, we too are facing the same questions.  Law firms and accountancy firms for example are right in the spotlight of that next serve from technology.

We provide advice (judgement/wisdom), we process documents and file them (transactional administration) and we also provide information (data).  Google also provides information.  And lots of it. And so do many other providers. Our clients can now get answers from the internet  to many of the questions they may have previously  asked us. They can now download documents that, once, they could only get from us.

Those firms that provide mainly transactional functions or services e.g. form filling and basic accounting are already watching some of this work go elsewhere or being done smarter.  The new accounting software known as Xero is a good example of a significant disruptor.

Solutions
Each industry and business sector will have its own nuanced response.  Here are some potential solutions that we are finding either helpful for ourselves or are noticing are working for others particularly amongst some of our more nimble clients.

1. Don’t be afraid of exploring the use of digital marketing e.g. improving your website etc.  We have found the key is to get connected with a good advisor.  Ask around – in our experience skills vary considerably.  Find a firm or person who ‘gets you’ i.e. understands you and your business ethos. Look at what other work they have done.  Look at ways that you could improve your website both for desktop and mobile devices increasing new client traffic to you.  If you are a small business this need not be a daunting task but the days are gone when this can be considered a luxury.  It is now an essential investment for many.
2. Understand what is happening in your industry in regard to the changes that technology is bringing.  Fear itself can become the problem (to misquote Franklin Roosevelt).  This is particularly the case when you spend some time reading about the technological changes and what other smaller companies are doing about it.  Information is power, or at least it’s a good light switch.
3. Think through a good strategy.  This is sometimes made a lot easier if you have a business mentor or, if you are a little larger, a professional director or consultant on board who is experienced in strategic planning and change management.  For smaller businesses mentoring services may be available in your area – Employer’s Associations, Councils and Chambers of Commerce may provide these services.
4. Don’t forget your existing clients.  They are your clients for good reason and you also need to focus on what many consider to be the number one fundamental piece of advice.  Provide your clients with excellent service and no reason to go elsewhere.  This is easier said than done, but small things can make a great difference, such as:
   1. Having great speed of communication and response times to your client – even if you can’t do the work straight away, at least let them know where they stand;
   2. Focus on creating a great staff working environment.  This can be a slow process but the investment is well worth it. Happy staff want to make clients happy; and
   3. Don’t do it alone.  Join an organisation that is most relevant to your industry and is one where there is good sharing of ideas and advice available.  Chambers of Commerce, Employers’ Associations, and Specific Industry Groups etc. are all potential sources of help and information.

Conclusion
You don’t know what you don’t know.  We are aware of how daunting all this can be as we are facing the same issues you probably are.  In a rapidly changing business environment the best advice we can give is to get the best advice.  In our experience those businesses small or large that are prepared to have an open mind and actively seek out good information (rather than just repeat past business practices) are the ones that tend to survive and grow.  Those that rely merely on tradition will get overtaken.  The difference these days is that the speed at which it happens is quite frightening.

We can help you
At Parry Field Lawyers we have had considerable experience with new businesses and well established ones.  We are involved with Start-ups and long held family businesses.  Although our involvement has often been with legal issues such as structuring, leases, succession and everything else you would associate with lawyers, much of our involvement has also been well beyond that. We can provide the benefit of our experience in dealing with hundreds of businesses over the years.  We accept that costs can be a deterrent to opening up such a discussion and we are always happy to come and have an obligation free discussion with you at your business site so that you can gain some comfort and certainty around what we can provide. In many respects this journey into the new technological age is a shared one and our own experiences can also be of benefit to you. Let’s stay in the game together.

Introduction

When considering entering into a joint venture arrangement in New Zealand with another party it is important to be aware of potential issues before they even raise their head and become problems.  This article describes some of the key points to watch out for if you are considering a joint venture in New Zealand. It can also serve as a good reminder of a checklist of points to consider to review the health of your joint venture if you are already in one.

1.         Valuing different contributions

It can be hard to value what each party brings to the table.  Typically a joint venture will be entered into because each party has recognized that the other one is able to bring some unique skill or background to a proposed business.  Often for one party this may simply be the ability to provide capital such as finance or land while the other party has a certain expertise.   Alternatively, two companies who are generally competitors may decide that working together will help them to scale up and achieve more.

Either way the key point is not to undervalue what you bring to the joint venture.  If the other party has an ingenious idea but no financing and you can unlock capital for their idea to grow, then you hold significant bargaining power.  Equally if you are the one with the industry expertise and knowledge then you should not sell yourself short in negotiations with a financier.  We have seen this from both sides and often wondered why one party wasn’t more highly valuing what they bring to the table. Sometimes there is a tendency to value tangible contributions over the intangible ones, which may not always be appropriate.  So, in each case hold out for as much equity and participation in the joint venture as you can.

2.         Form of joint venture

Most commonly we would see a new company formed under the Companies Act 1993, which has two shareholders.  That way the new entity will be a standalone venture separate from each of them.  Typically it will have its own set of advisors and employ its own staff (although one party may second certain individuals in to assist).  Profits will be returned as dividends to the shareholders.

However, that is not the only option.  Alternatively there could simply be a joint venture agreement between two parties which sets out how they will work together.  This is called an unincorporated joint venture.  There is no separate legal personality of the joint venture so it cannot contract on its own with third parties.  This model may be used for financing, tax or accounting reasons.

Another possible structure is a Limited Partnership under the Limited Partnership Act 2008. This structure may be particularly attractive when one of the parties is an overseas entity because tax liability sits at the level of the partners rather than in the corporate structure. Also the details of the limited partners are less publicly available.

It pays to work through the possible structures well in advance so you know what you want to propose to the other side.

3.         Ownership shares and deadlock

You may think that an equal sharing in ownership is fair and that is usually correct.  However, the danger of an equal split is that decisions can get stalled if the parties cannot agree and so deadlock can result.  This can have a negative impact on the profits and reputation of the joint venture.    There are some ways to deal with a situation of deadlock though which are outlined in the next point.

4.         Overcoming deadlock

A deadlock situation can be fatal to a joint venture.  This is especially so when the shareholding is the same and there are also an equal number of directors appointed by each party.  One way to deal with this is to have a rotating chairman who has the casting vote.   Also, there can be a list of really key issues which are reserved as decisions for the shareholders rather than directors.  All joint venture arrangements should have clear disputes resolution procedures, including, where appropriate the ability to refer matters to independent experts or umpires.

5.         “Service” arrangements and extraction of value

Commonly we see that one party is the expert in the subject matter of the joint venture and so they often end up contracting to provide services to the joint venture.  That is fine, but the other party should closely look at those agreements and build in clauses that ensure these will be “arms’ length” arrangements.  If one party is an overseas entity they may be relying on their local partner to provide a lot of the “on the ground” work.  They may not realise that the same local partner is extracting a lot of value from the arrangement with the company through charging of high consultancy services, management fees or other arrangements.

6.         Exiting the joint venture

There should be a clear pathway for getting out of the joint venture.  For example, if one party wants to exit they may have to first offer their shares to the other party before they can they sell to a third party.  Such pre-emption rights can be included in the joint venture agreement.

What if one party wants to exit and the other party does as well?  This can be built in as “tag along” rights so that the party who is selling their shares to a third party may need to allow the other party to join in that sale.  Other typical rights could include “drag along” rights where a party is able to force their joint venture partner to also sell their shares to a third party.  All of these options need to be considered and worked through at the start of the joint venture.

7.         Other points to consider when setting up a joint venture

The following issues should also be considered at the beginning:

• capital and funding obligations going forward;
• scope of the JV company;
• will it be permissible for the shareholders to enter into other joint ventures or initiatives that may compete with this joint venture?;
• business plan and budgets;
• management and who will lead the joint venture;
• ownership of land;
• circumstances that may trigger termination;
• tax implications;
• minority protection rights;
• information flow to parent companies;
• marketing arrangements;
• powers of veto;
• will there be parent company guarantees;
• confirm no competition law issues; and
• if a foreign company is involved, whether Overseas Investment Office (OIO) approvals needed.

8.         No one situation …

… is like the other.  Many joint ventures can have more than two parties, with variable negotiating power, parties with different skills, land or finance available.  It is important to tailor the documentation to the situation.

We have experience in setting up joint ventures and providing advice about different situations and would be happy to discuss your circumstances.