It can happen gradually – there’s been more arguing. You are getting on each other’s nerves and it’s building up to the day those dreaded words are said, ‘it’s over.’ Only it isn’t your significant other you are talking about, it’s your business partner.
Whether you’re a partner or a shareholder in a business, the damage from break-ups can be significant. It’s also magnified if there is a split involving a family business. However, the damage can be minimised if managed carefully from the outset.
Starting point – what sort of relationship are you in?
It’s important to understand what sort of relationship you are in. If you have set up a limited company then you will have a shareholding in it. If you own more than 50% then as a majority shareholder you will be in a stronger position to influence decisions that affect the business. However, a minority shareholder does have some protection by law so it’s important to understand what your position is before you say ‘we’re finished’.
Having a shareholders agreement is critical as it should clearly deal with issues which could affect the relationship. Importantly, it should set out what will happen to the shares when the relationship sours. Ensuring you have included in the agreement the right to be able to buy the shares from a departing shareholder ahead of an unknown third party, is important.
Even if there is no written shareholders agreement though, there may be evidence in emails that can be relied on to evidence the nature of the relationship and therefore what the entitlements are when you part ways. You cannot
always assume that because there is no shareholder agreement they are not a shareholder. It’s essential to seek legal advice so you know where you stand. It’s also essential to put a shareholder agreement in place at the outset.
The same applies to partners in a business which is not set up as a limited company. Having a partnership agreement that sets out what each partner’s rights are, and what happens when you split up, is important to be able to have as amicable a split as possible – and to avoid fatally damaging the underlying business.
A family business is where at least one representative of the family is involved in the management or administration. It is reported that 87.6% of businesses in the UK are family businesses.
Majority shareholders are often either the founder of the business or are related to the company founder. Sometimes though an individual may have inherited shares from a relative and suddenly found they are now a shareholder with very different ideas about how to run the business.
It therefore comes as no surprise that disputes in family businesses are not uncommon especially over issues like succession planning, investment and finances. This conflict can be made worse by family members trying to avoid the business disputes fracturing their personal relationships in the family.
Married couples are in a similar position when they are shareholders in a business and decide to divorce. If the dispute does end up in Court then the approach is usually to leave ownership of the business with the owner or founder. The other spouse will then receive a larger proportion of other marital assets.
How do you protect your business and avoid disputes?
So, what can you do as a business owner to protect your business from the risk of a damaging business break-up? Here are some steps you can take:
1 Ensure you instruct a Solicitor to draft a Shareholder or Partnership Agreement
This is the single most important step. A shareholder agreement should cover the responsibilities and decision-making power of each stakeholder, avoiding disagreements about who can do what and how they can do it.
2 Face any disagreements head on at the earliest opportunity
Issues need to be tackled head-on to achieve early resolution. Including a dispute resolution clause in an agreement will assist with that. Mediation is a cost-effective way to resolve disagreements.
3 Keep personal and professional life separate
As a business owner, there is likely to be substantial mental and emotional investment into your business. This can blur lines between work and home, particularly where family members are also shareholders. Take steps to put in place firm boundaries at home to ensure personal and professional lives are kept separate.
4 Consider what could be deemed a conflict of interest
Directors have an obligation to act in the best interest of Company and not for personal gain. When carrying out day-to-day activities be sure to consider any obligations as a business owner and what could amount to a conflict of interest.
5 Create a Board
Experience matters, and having the right people at the helm of the business will help steer you and your interests in the right direction. Consider appointing non-executive Directors, who can add value in several ways, such as bringing specialist knowledge to the business, and providing strategic support and advice.
6 Know your legal responsibilities
It is essential business owners are aware of their legal responsibilities, such as ensuring the right insurances are in place and complying with employment laws. Any business owner who is unsure of their legal obligations should seek legal advice to ensure they comply.
Loch Associates Group can advise on shareholder agreements, help resolve disagreements through early mediation and, should it get the stage of legal dispute, we can offer an expert legal team to guide you to a successful and swift conclusion.
Pam Loch, Solicitor and Managing Director of Loch Associates Group