The events of 2020: Another reminder that foundation documents matter for your business
Not many people would say that 2020 has been a smooth run. For business owners, this has meant they have had to re-assess strategic goals, pivot in their delivery of products or services, hibernate certain offerings (or the entire business), keep a sharp eye on costs and/or substantively alter business plans.
In many cases, this has been managed amicably between business partners, but in some cases it has not. The impact and consequences of the pandemic has again highlighted the need for sound foundational documents between business owners, to ensure that disputes and other issues can be dealt with efficiently.
Some issues that we have seen arise throughout 2020 include:
- One party wants to sell out but the other does not, and a better exit price will be achieved if the whole business is sold.
- The parties have agreed on unanimous decision making, but cannot reach a unanimous decision and failure to act is impacting the company’s operations.
- One party wishes to invest and expand the business, but the other wishes to maintain the status quo and continue only with existing capital.
- One party has a conflict of interest and is appearing to put this interest ahead of the interests of the company or business.
- One party wishes to divert its own resources and time to another business venture and put the existing business on the back burner but the other does not agree.
If you are in business with others or bringing on investors, then this year has been another reminder of the importance of having both a constitution and a tailored shareholder agreement (or equivalent) in place:
- A constitution can allow you to take advantage of rights that are not available to companies that have not adopted one. Importantly, this includes director indemnities and insurance.
- A well drafted shareholder agreement can clearly set out processes to reach resolution in the event of disagreement as to the way forward, which will ultimately save time and cost for all involved.
Business partners often believe that their sound relationship and intentions of good faith will see them through times of disagreement. However, we frequently see previously amicable relationships breakdown quickly, and a stale mate prevailing to the detriment of the business and its value, until lawyers or other advisors are engaged and seek to facilitate a resolution (at a cost to both parties).
A shareholder agreement can provide a process to resolve these disputes, with optionality to elect another path forward as the parties may agree. It is a document that you will hopefully never need to invoke, however is invaluable if it is required. It is a sensible investment for any new business.
We hope that the turbulence and uncertainty of 2020 is calming down as the end of the year approaches. But if you are in business with others (or are going into business with others) and do not have tailored foundation documentation in place, then please do not hesitate to get in touch.