When people set out on the road to business it is often like setting out in a relationship with a love interest… It is all smiles, dreams, what if’s and would/ could be’s and everything smells of roses. So high on the possibilities of what is to come and conquering the world – often the important, but boring, legal bits are forgotten.
As such the concept of what will happen if the s*** hits the fan does not normally compute… Much the same with ‘love’ relationships when it is all love, roses, and making future plans you don’t think about the break up and resulting consequences. In the normal world you don’t set off on the journey with a loved one and say okay but I need back up plan (pre-nup) just in case you/I/we don’t work out…
…Now I am not suggesting you have a pre-nup in place but in business, as a bare minimum, you do need certain documents in place and you need to know certain things. If you don’t set out certain details and information then potential fallouts and disputes could cause more than just a broken heart. There can be some serious consequences beyond losing a good business partner, director or shareholder.
Shareholder and bedroom (oops I mean Boardroom) disputes…
Like all personal relationships, disputes between shareholders, directors and business partners can arise for all sorts of reasons, from disagreements over the direction and development of a company to poor personal relationships. Conflicts of interest where individuals have interests in another business can also cause issues. Well let’s face it; you wouldn’t want your other half showing an interest in another party that wasn’t you! If a dispute erupts in your business, take advice immediately. Don’t throw all their desk contents out onto the office steps… You know what I mean!
Establishing what the legal position is from the outset helps you identify the best course to take. The right advice helps limit the amount of time and money you spend sorting out a dispute and its effects on your business. Having spoken to family law colleagues the same can’t always be said about divorce/ separation agreements…
A bit like a pre-nup but not really… Shareholder agreements and preventing disputes…
Anticipating potential problems often means it’s less likely that things will go wrong. Or at least when they do go wrong the likely outcome or consequences will be identified within the relevant documentation. A company’s articles of association, coupled with a shareholders’ agreement, can cover most of the potential areas of dispute between directors and shareholders.
I am sure some people would like to have an agreement in place so that when an argument ensues with their partner they could point to a document that sets out a resolution… Well, a shareholders’ agreement provides that very mechanism for resolving any serious disputes that do arise. Agreements may also need to set out a way for shareholders to part company, e.g. by establishing how other shareholders or the company itself can buy the shares of an aggrieved shareholder. I guess that bit is like a pre-nup!
Employment contracts should also anticipate the consequences of key individuals leaving the business. A departing director may have the right to compensation for dismissal. Contracts should also set out any restrictions such as preventing former employees from starting a competing business, or poaching staff or clients.
Similar issues arise in business partnerships. All too often, business partnerships trade without a clear written agreement between the partners. In the absence of an agreement, profits, losses and management control are automatically shared equally between the partners. What’s more individual partners can be personally liable for partnership debts. The departure of a partner, let’s say as the result of a partnership dispute, may automatically dissolve the partnership resulting in important legal and tax consequences. Really what we are saying here is that a clear, written partnership agreement is essential.
Effective control and management commonly known as Corporate Governance…
With most relationships you need good communication, management and a large dose of compromise. Control often doesn’t work in a healthy relationship… In business however, control is as essential as management, but compromise may be difficult when emotions get in the way… But… Good corporate governance helps reduce the risk of disputes and ensure that directors comply with their legal obligations.
As a minimum, directors should be aware of their rights and responsibilities. And I don’t mean knowing when staying out for that extra pint won’t result in ramifications of coming home late for tea! This should however include knowing what powers they have and when they need shareholder authorisation. Directors have a legal duty to act in the interests of the company. Simple rules on issues such as conflicts of interest can reduce risks. You may want to require directors to declare a potential conflict of interest and abstain from votes where appropriate.
Handling the fight…
Most people don’t like to argue, they don’t like to fight and would much rather find a different way to agree a resolution. Plus any Court action can be expensive and may not produce a satisfactory result. Using your strict legal rights as a bargaining counter, negotiation is almost invariably a better solution than ending up in court.
For example where shareholders are in dispute with directors, there are often alternatives to legal action. The shareholders may be able to request a general meeting to consider a resolution to dismiss a director; or alternatively, negotiating the sale of your shares could offer a better outcome than a drawn-out dispute.
Until next time, be aware, be compliant and remember to #GetLawSavvy.
