Shareholder disputes: Estranged entrepreneurs?

Britain is a nation that has always run on small and medium-sized businesses, and now it is a nation that is increasingly running on entrepreneurs. Entrepreneurs are by nature calculated risk takers, but are they placing their fledgling businesses at risk by not taking some simple legal steps?

Dispute resolution partner Claire Kitchen of London law firm Hodge Jones & Allen, explains:

“We are seeing increasing numbers of people setting us business with family or friends. While it can be great to work with people you know so well, entering into informal arrangements can place both parties and, ultimately, the business at risk.”

Claire says that the increase in informal business arrangements comes with an increase in the number of disputes: “People don’t always go into these decisions with their eyes wide open, preferring not to think about the practicalities such as how decisions will be made, division of profits and responsibilities and where each party stands should one person want to part ways.”

Therefore, she advises those who are entering into a business venture together to consider the below:

Draw up a shareholder/partner agreement:

As a starting point, it’s vital to ensure that when a limited company is incorporated, the parties enter into a shareholders’ agreement. Within this, the parties should agree a dispute resolution clause.

Shareholders and directors should be clear as to what is expected of them. If a shareholder is to carry out work in the company, they should have a service contract with an accurate job specification. Even if a shareholder is going to provide financial support only, it is helpful to have a document that shows what is expected, or not expected, of that person.

Background checks

Be commercially aware of who you’re going into business with, by undertaking thorough background checks. These can include criminal records, driving records, credit reports, education, past employment and professional licenses.

All parties should make sure they take good independent advice on working together, and everything needs to be agreed in writing via a solicitor. DIY legal documents can appeal but may not consider all the pitfalls, and problems may arise in Court.

Litigation is expensive

Disputes should always be a last resort, as litigation is expensive and the only beneficiaries are the lawyers; avoidance is always better. For the sake of saving a few pennies at the outset, you risk heartache and huge amounts of money down the line. Money can often be tight at the set-up stage, but you’ll spend a fortune unravelling it later.

Claire says: “I recently acted in a dispute between two shareholders and directors of a confectionary company, who had fallen out in a big way. They were both 50% shareholders in the company and had set up the business together, and equally invested time and money,

“After four successful years in business together, Mr. B felt that Mr. A was taking more of a back seat, lacked interest, and had business interests elsewhere.

“There was no shareholders agreement. Provisions had been removed from the articles of association which did not preclude a director from being involved in the running of other businesses.

“It turned out Mr. A had been diverting business to another of his business interests and had also taken out directors’ loans that needed to be paid back.

“On the other side, Mr. B was not blameless. He had frozen out Mr. A to an extent, and it later transpired that the lease of the premises from where the business was carried out was ultimately beneficially owned by Mr. B.

“A bitter legal fight ensued that only concluded following a mediation that the pair begrudgingly participated in just a few weeks before the trial was scheduled. Had they negotiated or mediated earlier, they would not have wasted sizeable legal costs and many hours of management time. However, this could all have been avoided by taking some simple precautions at the outset.”

Ends

For further information, please contact:
Lizzie Hannaway at Black Letter Communications
lizzie.hannaway@blacklettercommunications.co.uk
020 3567 1208

Notes for Editors

Hodge Jones and Allen

• Hodge Jones and Allen is one of the UK’s most progressive law firms, renowned for doing things differently and fighting injustice. Its managing partner is Patrick Allen, recently awarded a lifetime achievement award by Solicitors Journal.
• For 40 years’ the firm has been at the centre of many of the UK’s landmark legal cases that have changed the lives and rights of many people.
• The firm’s team of specialists have been operating across: Personal Injury, Medical Negligence, Industrial Disease, Civil Liberties, Criminal Defence, Court of Protection, Dispute Resolution, Employment, Family Law, Military Claims, Serious Fraud, Social Housing, Wills & Probate and Property Disputes.
• In 2016, the firm launched Hearing their voices – a campaign to raise awareness and build conversations around the issues and the injustices we might all face.