Friday, May 6, 2011
OPENING: A business owned by shareholders falls apart. Friendship and trust are lost forever. Who are these shareholders and what went wrong?
One day two friends decide to build a pub. One shareholder is the financial contributor and the other is the administrative planner – what a perfect combination of dollars and talents. They are excited about the prospect of a successful endeavour and forge ahead to set up business. They work overtime on the plans, submissions to city council, amendments, neighbourhood surveys, re-submissions, construction, supervision . . . and finally it is opening day. It is a momentous occasion.
They continue to work hard, but gradually each begins to feel he is putting in more than his fair share. Differences arise concerning repayment of the loan to the financial shareholder and how to evaluate the past contributions of the administrative shareholder who handles the day to day operations. Misunderstandings, discontent and resentment sneak in. The occasional pressure of setting up a business has become a constant and accelerates as each feels his expectations are not being met by the other. There is a further breakdown in communications. Purchasing supplies and marketing become haphazard. The Shareholders get on each others nerves and accusations begin.
There is no shareholder agreement to turn to.
The lawyer letters start to fly. Finally, the whole matter is resolved through the Supreme Court of British Columbia.
There is no guarantee that a shareholder agreement could have saved the business relationship. However, it would have required that the shareholders talk through the issues and come to a mutual agreement about those matters which became the source of conflict. The shareholder agreement would have provided a pre-determined procedure for the buyout of one of the shareholder’s interest in the company.
Put yourself into the shoes of one of the shareholders at the beginning of their business venture. Check off the boxes that appropriately describe the business plans with your shareholders.
We are optimistic about success
There is mutual respect for the skills of the shareholders
We have limited funds to set up the company
We have spent the initial capital on equipment, leasehold improvements and advertising
We have contingency plans for the loss of market share and recessionary times
We anticipate increased borrowing by the company
We recognize there will be management disagreements
We have discussed constructive ways of handling these disagreements
We have contingency plans in the event a shareholder becomes physically or mentally disabled
We have qualified legal, financial and tax advisors
We have clearly described duties and responsibilities
We have a code of conduct to direct our business and personal relationships
We have share purchase provisions for the retirement or early departure of a shareholder
We understand the concepts of “fair market value”, “share valuation”, “right of first refusal”, “share purchase shot-gun”, “drag-along” and “piggy back”
We have provided for share ownership transition in the event of the death of a shareholder
We have funding for the purchase of shares from the estate of the deceased shareholder
Do you agree that the operators of the pub did not plan for the unexpected? Does it make sense to have had a shareholder agreement? If you agree, then you will appreciate the consequences of unresolved differences, which lead to the failed business, financial loss, stress and lost opportunities. You understand the importance of investing in a shareholder agreement.
Cohen Buchan Edwards LLP can help you minimize your business risk. We work with you to develop sound contingency plans to protect your business investment. Call the business lawyers at Cohen Buchan Edwards LLP. Our website is www.cbelaw.com
