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Director and Shareholder Disputes

18th April 2018 | Bailoran Solicitors

If you run a business with anyone else then this is akin to a “Business Marriage”.

A lot of people “tie the knot” without considering what may happen in the future whether the business succeeds or fails.

Businesses are governed by the needs and wants of those in control and this affects the direction a business takes. If these needs and wants are not addressed early it may lead to a future fallout within the business where there is either deadlock or you are voted out of office.

The choice at that point is whether or not to engage in a potentially lengthy and costly legal battle which is likely to also cause stress and result in something similar to an ugly divorce.

Think of preventing business disputes in terms of having a business pre-nuptial agreement which is usually a shareholders agreement and directors service contract. The equivalent for partnerships is a partnership agreement. These documents include terms to fall back on in the event that things do not go according to plan with a co-owner or controlling individual.

Factors leading to fallouts:

At the outset of a new business there is often a honeymoon period as the business is unlikely to have anything to lose e.g. there is no client database, no cash in the bank and all involved are desperate to ensure the business succeeds, so everyone works towards a common goal such as selling goods or services.

However, as a business grows the original relationships and dynamics can alter considerably with some roles becoming more demanding e.g. Sales, HR, Accounts, Administration. Once the original dynamic of collectively controlling and knowing everything about the business has altered this can often lead to a belief that one role is worth more to the business than another as these roles get divided between those in control or are delegated or outsourced.

Unless the owners have strong foundations by discussing these potential problems beforehand it can lead to a disconnection which may harm the future of the business.

Other common factors leading to a disconnect include a change in personal or financial circumstances, serious illness or absences from work including long or regular holidays, a lack of enthusiasm from others or a feeling others are coasting, a belief that you can get someone else to do a co-owner’s job better and for less money and resistance to change.

How can I prevent against this?

Ask each other at least the following important questions:

  • What are your personal and professional objectives for the next 10-25 years?
  • When do you intend to retire?
  • What happens if you are incapable of working or die?
  • What are your goals for the business including size, number of staff, locations, goods and services offered?
  • What roles are required and what roles do you want to play in the business?
  • Is there any intellectual property or database unique to the business? If so, who owns it and who can use it if the parties split?
  • Should you allow others to have an interest in the business?
  • What happens if you want to leave the business or sell it? How should your interest be valued?
  • Who has the final say on any particular matters?
  • Are you willing to give personal guarantees or loans to the business?
  • Should there be any restrictions on other interests the owners have?
  • How should you be paid and when?

Dependent upon the answers you can identify if you each have the same goal.

If you decide to continue, once you have these answers you should document them in writing as a director’s service agreement or shareholder/partnership agreement.

A good agreement should cover the majority of potential eventualities and all parties then know what will happen in most given circumstances from the outset.

To not have an agreement between owners of the business puts the business at a significantly increased risk including, in the worst case scenario, the business being wound up.

Prevention really is better than cure and if you want the business to thrive you should be able to discuss these heavy topics at the outset.

If nothing else it is better to realise that the business relationship will not work before you start to incur costs and become dependent upon the income it generates as the costs to unravel the process without any agreement are often catastrophic to the business.

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