Shortage Of Capital: Equity Syndicate

The cost of buying land is often prohibitive for an individual and maintaining ownership can also become difficult. One way of dealing with funding issues is by joining with others and pooling capital - in other words forming an “equity syndicate”. An equity syndicate allows multiple parties to share in the risks and the rewards associated with a farming operation or other agribusiness.

In this article I comment on some of the legal matters to be considered before forming an equity syndicate.

Securities Act 1978

When attempting to establish a syndicate care needs to be taken not to infringe the Securities Act 1978. If shares in a company are to be offered to the public, the Act imposes rules on the advertising of a pending offer and on the information to be disclosed in respect of the offer. The aim is to promote informed investment decisions. A key matter to be addressed then is whether the target investors are “the public”. They will be “non-public” if, for example, they are relatives, close business associates, or habitual investors.

Who is a close business associate?

In Securities Commission v Kiwi Co-operative Dairies Limited [1995] 3 NZLR 26 the Court of Appeal held that in order for a person to be a close business associate there must be “a degree of intimacy or “business friendship” in the relationship” such that it would overcome any inequality which might otherwise be present. In this case, the required degree of intimacy didn’t exist between the company and its supplying shareholders.

Who is a habitual investor?

Again there is no clear test. Some factors that may be influential: the number of investments made within a period of time; the nature of the investments; the amount of money involved; and the success or otherwise of those investments.

The Act extends beyond shares in a company to cover other securities including where property ownership rights are shared with others and an exemption doesn’t apply.

Participants’ Agreement

Once the participants have been found, it is important that they consider what rights and obligations each participant is to have. In the case of a company, those rights and obligations will be documented in a shareholders’ agreement with the intention of providing each participant with a degree of protection of their investment depending on the amount of their contribution.

Protections I would expect to see in a shareholders’ agreement include:

the right to have a say in decisions through voting power;
limits on the activities that the company can undertake (such as an increase in borrowings) without the support of a higher majority of the shareholders;
provision detailing whether or not there is an obligation to contribute further capital and, if so, the terms on which that capital is to be invested;
a profit distribution policy;
restrictions on participant conduct which might adversely impact on the business of the company;
an obligation to disclose conflicts of interest and the impact this has on voting rights for example where a participant is a non performing farm manager;
controls on the admission of new participants;
in most cases, the scope to voluntarily exit the company and realise the investment;
an ability to force a shareholder out of the company;
guidelines for determining the value of an interest and how those guidelines are to vary depending on whether the outgoing participant is proposing to leave on good terms or bad;
an ability to appoint and remove directors;
a mechanism for dealing with a deadlock between participants; and
the circumstances in which the relationship can be brought to an end.

The agreement is intended to manage risks arising – in practice, participants need to be well informed of how those risks could still effect them. For example, even if a minority shareholder has the right to extract his or her investment the ability to do so will depend on finding a replacement investor who is prepared to join an existing syndicate and is acceptable to the other participants.

Management Agreement

Whether or not the day-to-day management and operation of the farm is the responsibility of one of the participants in the equity syndicate or an independent, the relationship between that manager and the equity syndicate should also be formally documented. I will comment on this in my next article.