The relationship between most business partners does not last forever and it is rare to expect it to. Each year we deal with many disputes between business partners, whether they are co-owners of a business set up under a corporate structure or a traditional partnership.
Just because partners decide to part ways, it does not mean they need to fall out and end up in a costly dispute. However, in reality this is often what happens.
Disputes often happen because the relevant documentation detailing the relationship between the partners is unsatisfactory and is not kept up-to-date. This results in the business partners having different views as to how to deal with commercial matters.
Business partners can decide to part company for a number of reasons. It could simply be because they wish to retire. Often, however, business partners part company because of a dispute between them about an operational aspect or business ownership/control.
Our experience in dealing with a great many disputes between business partners is that there are a number of common recurring factors that have been the catalyst for conflict. Most of these factors could have been easily avoided if the business partners had taken the time to ensure that certain measures were in place.
On one view, these measures are so obvious that you might query why we raise them. The reason is that time and again business partners get these basic things wrong.
Common recurring causes of business partner disputes
- The parties do not have and have never had a suitable or appropriate written agreement governing the rights, responsibilities and control issues relevant to the business and their relationship with each other.
- The parties have an agreement governing their business relationship which is not appropriate for the nature of the business, as it has developed over the years.
- The parties have done things during the course of the life of the business which were not anticipated or covered by the agreement and the business partners have differing understandings/expectations about the effect of these things. For example, we often see instances of one business partner putting personal funds into a business without there being any firm understanding as to the basis upon which the funds were put into the business: are the funds a loan? If so, is interest payable and when is the loan repayable? Are the funds a mechanism whereby the party putting in the funds purchases equity in the business?
- It is often the case that business partners (who, when times are good, trust each other implicitly) discuss all sorts of possible options with respect to funding, loans to the business, control, authorisation to enter into transactions, but an agreement in relation to these matters is never properly reduced to writing or signed off. This can lead to problems at a later point in time when there is no firm understanding between the parties as to what was agreed.
It is all of these factors that time and again lead to costly disputes and a break-down in business relationships.
When business partners are busy and the business itself and the relationship between the business partners is going well, the documentation of these things does not seem to be important and accordingly are often not properly addressed. This has the effect of leaving important matters in a state of uncertainty.
These kinds of disputes invariably can be avoided if the parties, in a regular and methodical way, take the time to address matters relevant to the ownership and control of their business.
The best time to undertake a ‘health check’ of your business relationship is when things are going well. It is at this time that business partners are more likely to have a common understanding about the factors relevant to their business relationship. It is also at this time that business partners are most likely to be amenable to ensuring that the relationship is correctly and accurately documented. People are not usually looking for the exit when things are going well.
If the business is suffering a down-turn, or there are signs of the beginning of a break-down between the business owners, it is generally much more difficult to document an agreement between business partners.
There are many matters that should be clearly and properly documented in the shareholders’ agreement or partnership agreement. Some important matters that have led to disputes, either because they are not documented at all or because they are not documented in clear and concise terms, have included:
- Agreements which do not have a mechanism for the situation where one or more of the business partners want to leave the business.
- Agreements which do not have a mechanism where a majority of the business partners wish one or more of the other business partners to part company.
- Where a business partner has injected money into the business without there being a documented agreement as to the basis upon which this was done.
- Where a business partner has not withdrawn his/her share of the profits from the business: how are these profits that remain in the business characterised? Do they entitle the business partner to a greater share of the equity in the business?
- Where a business partner becomes involved in or associated with a competing business.
- Where business partners cannot agree on whether profits should be distributed to shareholders or reinvested in the business. Business partners often have different personal financial circumstances and one of the business partners or group of business partners may have a greater need for a distribution of profits.
- Where one or more of the business partners has been taking moneys from the business.
- Where one or more of the business partners is not spending as many hours in the business as the other(s), leading to resentment because this is not reflected in profit distributions.
Steps for undertaking a business ‘health check’
Assuming that your business has a shareholders’ agreement or partnership agreement, it should be reviewed on a fairly regular basis to ensure it is adequate to address the issues that are likely to arise between the owners of the business, given the nature of the business, in its present form and that it reflects the reality of the relationship between the parties.
You need to ensure that your shareholders’ agreement or partnership agreement adequately deals with decision-making, control, distribution of profits, procedures for parting company, restrictions on competition and resolution of disputes.
Ask yourself the following questions today:
- Does your shareholders’ agreement address all of the relevant matters between you and your business partners?
- If one of your co-owners wants to leave the business, does the shareholders’ agreement set out a clear procedure for achieving this amicably?
- Is there any important arrangement or understanding with your business partner(s) which is not contained in a signed agreement?
If the answer to any of these questions is ‘No’, then you need to do something about it.
When business relationships are properly and clearly documented, the scope for dispute between business parties is substantially reduced. Alternatively, if there are disagreements between owners, if the shareholders’ agreement or partnership agreement accurately identifies all of the relevant parties’ rights and obligations, it may be possible for the disagreement to be resolved efficiently, which in turn would allow the parties to continue operating the business without there being a complete breakdown in the relationship – which is unfortunately a frequent consequence of a dispute.
Disputes between business partners are divisive and the bottom line is they are not good for business. Undertaking regular housekeeping of your business documentation can go a long way to ensuring a long-standing and healthy relationship with your business partners and this will serve to increase your business success.
At Meridian Lawyers, we have a team with significant experience in advising small to medium size business owners on corporate documentation and commercial disputes when they arise. We have a successful record of assisting clients to avoid disputes.