Pictured: Peter Sutherland
Businesses can suffer irreparable damage when directors disagree
over company policy. Peter Sutherland from Anderson Solicitors
believes many problems could be avoided if firms draw up agreements
in advance, outlining what should happen if disputes arise.
Directors might like to think they're hard-headed realists but
that doesn't necessarily stop them running headlong into business
relationships which they later come to regret.
If the new partner in a joint venture turns out to be hard to
deal with, settling disputes can become very difficult. At that
point, just like many married couples, both sides may wish they had
a business 'pre-nup' in place.
Such agreements should set out how disagreements should be
settled in a way that is fair to both sides and for the greater
good of the business. It is obviously better to decide on such
issues at the start of the relationship when there is still trust
and goodwill, rather than wait until things turns sour.
One simple matter would be to decide a policy on the transfer of
shares. If one director wants to sell some of his shares in the
future, should the other be allowed first refusal to buy? Should
partial disposal of shares be allowed, or should it be forbidden to
avoid fragmentation.
Problems can arise when two directors have equal shares in a
business and therefore equal control. It could lead to deadlock in
the event of a disagreement. One way round this is to agree an
arbitration system. This could be done by nominating an independent
third party as an arbitrator. This should be someone who
understands the business and is trusted by both sides.
The first task of the independent arbitrator would be to try to
help the two sides reach agreement. If that proves impossible, the
arbitrator could then make a decision on principles set down by the
directors in the pre-nup.
However, if disputes are impossible to resolve, it may be
necessary for the directors to end their business relationship.
This could be done in several ways. For example, the business
could be sold to a third party, in which case the directors would
need to decide in advance how the proceeds should be divided.
Alternatively, one director might buy the other's shares.
In that case, it would sensible to set out in advance how the
shares should be valued. The valuation could be based on the
company's assets, its profits or by some other method.
There could also be disputes as to which director buys out the
other, assuming they both want to continue with the business. There
are various ways to settle this, including one system which is
sometimes rather dramatically referred to as a shoot-out.
This involves each side submitting sealed bids for the other's
shares, with the higher bid winning. The winner gets the business,
while the 'loser' also wins because he gets a higher price for his
shares than he was prepared to pay himself.
These are just some of the issues that could be covered in a
business pre-nup. Other key factors would include what to do with
future assets generated by the business, such as intellectual
property, and covenants restricting a director's right to leave and
set up a rival business within a specified period.
Laying down some simple ground rules in advance can prevent long
and complicated disputes further down the line.
For more information please contact Peter Sutherland, Commercial
Partner on T. 0115 988 6714 or E.
psutherland@andersonssolicitors.co.uk.