However, there is one major factor which often gets overlooked regardless of whether it is a cornerstone investment or a simple financial investment that is being contemplated. This oversight, if not remedied early, can eventually lead to disharmony and disenchantment further down the track. What I am referring to is the review and audit of a number of key documents, namely, the constitution, shareholder agreements, and any relevant MoUs agreed between shareholders. On most occasions, particularly where a company has grown over a number of years, the documents have been filed away in a lawyer’s office or reside in the company secretary’s bottom draw. They are often completely out of date and they fail to reflect the company’s current structure, governance procedures or its operating model. In some cases subsidiary companies have been formed or joint ventures entered into and the various legal corporate documents are an uncoordinated mixture, which if tested in a court of law would not stand behind the acid test of protecting the company and shareholders from possible litigation.

It always concerns me when an investor leaves this review and audit of such important documents to the last step in their decision making process. Surely the shareholders' agreement is critical to protecting any investment. There will be various classes of shares, there could be free carries, preferential shares with specific dividend controls, director appointments etc. etc. The conditions imposed will either enhance or diminish the security of the investment. If it’s a cornerstone investment being contemplated then obtaining agreement from the existing shareholders to changes to the legal documentation underpinning the company’s obligations and governance, particularly the shareholders agreement, is absolutely critical to the investment process. Surely this is a task that should be tackled early on in the negotiation process and not left to the end?

While my comments are more slanted towards the private market I’m also surprised at times by the lack of concern from investors on the stock market regarding the legal documentation underpinning public companies obligations, responsibilities and duties. The common theme is that the stock brokerage firms and the stock exchange monitor these issues. That’s not quite true as we’ve seen over recent years with the various financial meltdowns.

Perhaps it’s time for both private and institutional investors to raise their level of awareness around the legal aspects of the companies they are looking at investing in and be very clear as to what their rights as shareholders are before contemplating an investment.