Since trademark registration is only part of your overall company strategies, its success or not should be seen in a broader context, i.e., the corporate structure of your company.
It is far too common to see a group of good friends or a sweet couple starting a company with huge spirit and full energy, ending up with endless quarrel and hatred. When the relationship turns sour, shareholders’ interests will no longer be aligned. Don’t presume then that you can get anything from the company (including the trademark under the company) unless you have a fair corporate structure. I will now show you the story of my friend Yeti to pinpoint the importance of setting out in writing the rights and obligations of the shareholders at the outset.
Yeti was a florist and single-handedly founded a floral shop “FLOWERFUL” four years ago. Yeti has a pair of good eyes, and her floral design always wins the audience’s hearts. Nonetheless, the “FLOWERFUL” business had a slow start, probably because Yeti was rather a shy and non-commercial girl, and treated FLOWERFUL more a hobby than a business.
Around two years ago, FLOWERFUL became short of money. When knowing this, Yeti’s university roommates Natalia and Cindy offered at no time to invest US$100,000 each on FLOWERFUL. The three girls set up a limited company Flowerful Limited (the “Company”) in equal shares and applied for the “FLOWERFUL” trademark under the name of the Company.
With the extensive business experience and networks of Natalia and Cindy, FLOWERFUL is now in flying color turning deficits into handsome profits. The ambitious Natalia and Cindy would steer FLOWERFUL into a real O2O brand by investing heavily in IT infrastructure and setting up quickly a handful of physical shops.
On the other hand, Yeti is simply contended with the current scale and rather worried about the drop of qualities as a result of the quick expansion. However, the poor Yeti now only owns one-third of the Company, and can’t keep her “FLOWERFUL” floral business in her own way, even as a founder.
If the clock could turn back to two years ago when Natalia and Cindy decided to join in, what could have been done by Yeti to better protect her interests?
1. File a trademark under the name of Yeti
Before setting up a company with Natalia and Cindy, Yeti should have applied for the FLOWERFUL mark in her own name first so that she can have a firm grip of her self-created mark. Of course, Flowerful Limited is required to use this FLOWERFUL mark in the course of business, and Yeti can execute a royalty-free licensing agreement with the Company.
2. Yeti should sign a shareholder agreement with Natalia and Cindy
As it stands, Yeti owns one-third of the Company as a minority shareholder. As you can appreciate, many decisions could only be made with a majority of the shareholdings of a company, and Yeti’s position looks vulnerable if Natalia and Cindy form an opposite camp.
In some jurisdictions, shareholders’ basic rights and obligations are fairly set out in the local company laws, but in other jurisdictions, the laws keep silent in many aspects to give greater flexibility for the shareholders to design their own structures. This is when a shareholder agreement comes in to safeguard respective interests.
Yeti could consider adding the following clauses into a shareholder agreement with Natalia and Cindy: –
(a) Board Meetings: Yeti will never be removed from directorship, and will always form the quorum and chair all the board meetings with a casting vote.
(b) Veto rights: For certain big decisions of the Company, Yeti will be entitled to a veto right, or that a unanimous decision is required.
(c) Pre-emptive rights / Drag-along / Tag-along Clauses: They are some clauses governing the sales of the shares of the Company so that each shareholder (including Yeti) will enjoy some privileged rights if other shareholders decide to sell the shares of the Company to another third party.
(d) Anti-dilution clause: If the Company needs capital for further investment, the shareholders may be requested to inject money to increase the share capital. An anti-dilution provision is a mechanism that serves to mitigate the dilutive effect of future stock issuances on Yeti if Yeti does not wish to inject money.
(e) Distribution of Dividends: Shareholders may pre-agree the level of profits to be distributed as dividends, say 70% or 90%. With a higher percentage, less money will be left for the Company for future development/investment.
Long story short, Yeti could draw up the future plan of the management of the Company affairs by way of a well thought and drafted shareholder agreement, to achieve her own commercial objectives.
If there is one lesson the Yeti’s story has taught us, it is that planning early pays off.
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