Business Partner Disputes: Shareholder Buyouts.
All business partners start out with the best of intentions. However, it is important to have the right documentation in place from the beginning of your business relationship, so if the time comes when you want to part ways, the buying and selling of company shares is a smooth process.
The following scenario details a case where two business owners did not have the appropriate documentation in place, and how this impacted the process when one of them wanted to exit the business.
Guy and Steve were friends at university when they decided to go into business together. They had been in business together for over 10 years and although they got along very well in the beginning, as the business grew, they had differing opinions on the company’s priorities and future direction. They eventually came to the conclusion that the best course of action was to part ways.
Guy was passionate about the business and did not want to sell it. He wanted to buy Steve out from his share of the company, so he got in touch with his lawyer seeking legal advice to help them with this process.
From the meeting with the lawyer, it soon became apparent that the company did not have a shareholders' agreement or a constitution.
This meant that there was no definite process to follow for one party to sell shares to the other and they would need to start negotiating and drafting agreements now, which would take time, and potentially cost more money than if they had had clear documentation in place from the beginning.
Guy’s lawyer recommended they draft a sales and purchase agreement. As part of that process, he also advised that they should arrange for an independent party to value the company so there would be an objective assessment of the purchase price. When Guy suggested the company accountant could do this, Steve disagreed, as he thought their company accountant could be biased towards Guy. They both agreed to have the president of the Law Association appoint an independent accountant to value the company.
Because they had not outlined any restraints of trade upon an exit of a shareholder in a shareholder's agreement at the beginning of their business relationship, Guy was worried that Steve would set up a competing company once he had sold his shares. Guy made sure to ask his lawyer to add a restraint of trade clause into the sale and purchase agreement preventing Steve from setting up his own company and competing against the existing company for three years.
Steve was worried that he had given personal guarantees in favour of the company.
So, they also agreed to include in the sale and purchase agreement that all personal guarantees given by Steve were to be removed and for Guy to take on the future liability and responsibility of the company.
Agreement reached, on the settlement date, Guy paid Steve for his shares at their fair value and took full ownership of the company.
Guy and Steve were fortunate to have reached an amicable end to their business partnership and were even able to stay good friends afterwards. Unfortunately, this is not always the case.
While it’s always better to start out how you mean to go on and seek expert legal advice to avoid risk and maximise your position, you can still do this should you find yourself in a position like Steve or Guy.
If you feel you could use some specialist advice, don’t hesitate to contact the Commercial Team.
