Shareholders disputes and how to avoid them
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Articles by John Rowe
We were recently involved with assisting a new client to resolve a dispute between shareholders. This was a prime example of a business succession planning scenario going wrong.
On the face of it, the client had everything you should have, such as a constitution and a shareholders’ agreement, but the relationship got such that it was completely dysfunctional and was causing the business to fail. And it certainly would have failed if the situation had not been resolved.
The trouble was that the shareholders' agreement they had in place was impractical, uncommercial and didn’t provide for a smooth process for resolving disputes. It was a case of good intentions but no practicality or commerciality.
As a result, the client incurred tens of thousands of dollars in costs and a whole lot of time trying to resolve their problems, as well as losing focus on the business while this was going on. All of this could have been avoided if they’d had a robust shareholders’ agreement and the right structures in place at the outset.
The lesson here is that if you are going into business – whether with a fellow property investor, a friend, or bringing an employee in – it’s important to get the relationship right both at a personal level but also commercially.
The trouble was that the shareholders' agreement they had in place was impractical, uncommercial and didn’t provide for a smooth process for resolving disputes. It was a case of good intentions but no practicality or commerciality.
As a result, the client incurred tens of thousands of dollars in costs and a whole lot of time trying to resolve their problems, as well as losing focus on the business while this was going on. All of this could have been avoided if they’d had a robust shareholders’ agreement and the right structures in place at the outset.
The lesson here is that if you are going into business – whether with a fellow property investor, a friend, or bringing an employee in – it’s important to get the relationship right both at a personal level but also commercially.
What happens if you bring an employee in with a small shareholding and then you have a falling out? They could leave your employment and go to a competitor. While they are still a shareholder, you must provide them with financial statements and they could force you to incur additional expenses, e.g. audit fees and hassles when undertaking major transactions.
What if you and your business partner are at different phases of life, or one gets sick and needs to exit? It is important that solutions for these scenarios are locked in to the shareholders’ agreement.
It can be stressful to resolve and address fundamental issues, but often sunlight is the best form of bleach - in other words, address and resolve possible scenarios before you have an issue. It is far better to get your structures right and put in place the appropriate agreements/rules and never need them, than to have an inadequate agreement (or worse, no agreement at all) and then to try and resolve issues once you have a problem.
If you are concerned that your current structures/agreements are not up to scratch or you’d like to bring someone else on board in your business etc., and you want to discuss the most appropriate way to move forward, please fill out our online form, contact us at info@gra.co.nz or phone +64 9 522 7955. We would be very pleased to help you.
What if you and your business partner are at different phases of life, or one gets sick and needs to exit? It is important that solutions for these scenarios are locked in to the shareholders’ agreement.
It can be stressful to resolve and address fundamental issues, but often sunlight is the best form of bleach - in other words, address and resolve possible scenarios before you have an issue. It is far better to get your structures right and put in place the appropriate agreements/rules and never need them, than to have an inadequate agreement (or worse, no agreement at all) and then to try and resolve issues once you have a problem.
If you are concerned that your current structures/agreements are not up to scratch or you’d like to bring someone else on board in your business etc., and you want to discuss the most appropriate way to move forward, please fill out our online form, contact us at info@gra.co.nz or phone +64 9 522 7955. We would be very pleased to help you.
John Rowe
Director
Business Accounting Services
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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