Friends don’t make good business partners by Geoff Brooke-Taylor, partner in Alsters Kelley
Author: Geoff Brooke-Taylor
Last Updated: 10/6/2010 2:49:02 PM
Summary
It is very common for friends to start a business together and for each to hold a 50 per cent holding. Most arrangements work well so long as the business prospers and they don’t fall out.
Article
However, the whole enterprise can grind to a halt and both
parties lose everything if they fall out or one of the parties
wants to go in a different direction for any one of a number of
reasons, and there is no Shareholders Agreement to resolve the
problem.
If there is no consensus (or shareholders agreement) and an
impasse develops, the only legal remedy is to go to court and seek
a formal winding up of the business. In that situation, the assets
will be sold, which usually means all the accumulated goodwill in
the business has no value. You will have put in a lot of effort for
almost nothing.
The main value of a shareholder agreement is to formalise how
things work when they would otherwise hit this legal brick wall. It
allows each party - and it does not just apply to two-person
enterprises - to set out what they want. Without such an agreement
it can be impossible for a business to move forward because, with
very few exceptions, no shareholder can be forced to sell their
stake in a private limited company.
Such an agreement will cover areas such as entitlement to and
liability for profits and losses, how minority shareholders are to
be treated, the payment of dividends and so on. If there are
minority shareholders there can also be provisions protecting them
in certain circumstances.
Crucially, it will also include a mechanism for resolving
disputes outside the costly court process, whether by an option
process for buying/selling the shares, the use of a mediator or
other methods.
It will also provide a mechanism for valuing the shares of a
company - though the reality is that shares in a private company
are only worth what someone is prepared to pay for them. Owners of
businesses often have an inflated view of the values of the
business, but if no-one will pay that, or lend that much, the value
does not exist.
Although it is tempting to see parallels with the concept of a
prenuptial agreement before marriage, the important difference is
that a shareholder agreement is 100 per cent legally binding.
Many people assume that their new venture will be a success and
that the founders will always work in perfect harmony, but this is
not always the case and the investment in a shareholder agreement
at the outset will more than pay off in terms of saving financial
and emotional headaches further down the line.
This is particularly the case in a recession, when businesses
are finding life very difficult, and all partners/shareholders need
to be able to depend even more closely on each other.
About the Author
Geoff Brooke-Taylor is a partner in Alsters Kelley Company Commercial
department. He advises on company law, directors' duties and
shareholder protection, corporate transactions, commercial
contracts and IT, intellectual property and charity-related
issues.