One thing that is nearly as awful as getting divorced from your spouse, is to go through a toxic business break up.
Similar to divorces, some splits are amicable, others are tolerable and some are a complete nightmare. There are a number of key reasons that cause business separations which arise time and again.
- Uneven contributions – this is where one party notices that they are contributing more (for example, working more hours or, additional business development or management, adding in more funds etc) than another party. Although, the parties will generally have conflicting views.
- Failure to make decisions – the parties not agreeing on how to run the business, varying from operational problems through to the strategic management of the business.
- Lack of communication – not enough talking or not enough listening. Upon reflection, the parties can usually see the signs of where things started to go wrong and often communication has played a part.
- Lack of alignment – this has a tendency to permeate into all other matters. This may correlate with the financial alignment (for example, the financial gain for the contributions made by the parties being seen as unbalanced), variances in management style or even the parties being in different phases of their lives/careers. In this case, it’s not unusual to see an age gap between disputing business owners.
- Financial pressure – By the time lawyers get involved, generally issues have now reached a breaking point and the parties have tried but have been unsuccessful to negotiate their business separation. Often the business’ accountant has been caught in the middle and has unfortunately needed to encourage the parties to get lawyers involved.
At this stage, the business breakup usually becomes foreseeable, and if not sorted out quickly the business starts to suffer with the staff and customers caught in the middle.
Similar to a divorce, the parties often find it hard to look at things fairly. It is essential to be represented by a lawyer at this point not only to guide you on what you ought to be doing but also possibly what to avoid. For example, parties often dedicate a lot of energy concerning who was at fault for the separation, and this is generally not helpful to actually implementing the (now inevitable) separation.
It is at this point that the value of having a Shareholders Agreement becomes evident. A well-drawn up agreement will allow the parties to initiate a pre-agreed and binding procedures to resolve the dispute – usually allowing the initiating party to qualify buying out the other party, including an independent valuation if needed.
Dependent on the circumstance, there may be more than one method that can be applied, and it is vital to get advice on the most appropriate way to proceed and when to do so. The agreement will usually also allow for certain rules to apply at the post-separation stage, including non-compete obligations, repayment of loans, removal of personal guarantees and related issues.
Finally, the parties will usually agree to deviate from the exact process in the agreement (for example, exceptions to non-compete obligations that might have been too much of a burden so that the exiting party can still be gainfully employed) but usually negotiations will not have come to that point without having the agreement in the first place.
Apart from one party buying out the other, other methods of accomplishing a business separation include winding up the business and the parties disbanding (on some occasions, requiring a Court Order), or a sale of the business to a third party (usually, only possible where the parties are still amicable).
If no Shareholders Agreement has been written up (or worse at times, a poorly drafted agreement) the parties will need to be more tactical in negotiating a separation, and it will be a lengthier process to get to that point.
In this respect, lawyers will consider the different hats the parties have worn in the business (employee, director, shareholder, lender etc) and seek to use those positions as an advantage to encourage a particular outcome.
Consider for example, if one party has lent money to the business – is there a right to call in repayment and is there security that can be imposed over the assets of the business?
Some other matters which will also impact the situation as negotiations ensue, include the personalities of the parties (and their lawyers and other advisors), the parties’ strong connections with staff and customers, and certainly, who may have deeper pockets.
This process will be more complex and unpredictable in comparison to where there is a well drafted Shareholders Agreement.
These issues do get resolved in the end, but they don’t without assistance and getting advice early is generally the best solution and guarantees the best results.