Shareholder Resolutions For A Conflict-Free 2010
By George Frier

While companies large and small struggle with the recession, tensions can emerge within businesses, which can lead to conflict, and conflict can damage wealth. Business owners and management should ensure they structure their business arrangements to minimise the risk of shareholder conflict. By adopting the following New Year resolutions, businesses can ensure 2010 is as conflict-free as possible:

Choose your business partner carefully
When going into business with someone, choose carefully. The starry eyed passion and early enthusiasm for a project may make the earth move but do you really know and understand your proposed shareholders? Marry in haste, repent at leisure. Be wary of hidden agendas.

Document the relationship
Spend the money on a Shareholder Agreement to clearly set out the structure and future operation of the business – in a defined but flexible way. Don’t rely on trust alone. Does what matter require joint or a particular percentage approval by shareholders? Can some matters be delegated to certain people? What are the reporting lines? If there are shareholders not active in the business, what rights have they to receive management information and to exercise any controls?

Prepare a Business Plan
“If you fail to plan, you plan to fail”. Your bank or other investors will almost certainly require this. Have all shareholders bought into the business plan? Are they clear what is expected of them? Then, monitor performance against the business plan. That way you are better placed to take corrective action should the need arise.

Manage your contracts
Ensure that you have proper terms and conditions and that these are always incorporated into your contract process. Check procurement and contract risk procedures are understood. Set limits on who has authority to negotiate and conclude contracts. If a manager concludes an onerous contract (eg. one with no exclusion of consequential losses), it could cost the business dear.

Manage your Intellectual Property
Intellectual Property in a business often still resides with the founders. Make sure that it is transferred from the ownership of any individuals into the company, or consider a separate company to licence the IP to the trading company. Make sure that you document know-how that cannot be registered.

Protect your business with appropriate covenants
Restrictive covenants may be appropriate for shareholders/directors and also senior or key staff particularly in sales positions. These include non-competition as well as non-solicitation of specific customers (which is often sufficient and easier to enforce). Take legal advice, and discuss these matters while the atmosphere is friendly – it is too late if things have soured.

Think how to deal with Deadlock
Particularly if you have parties with equal shareholdings but differing interests or (say) parties of different economic strengths, there needs to be a mechanism to break deadlock. Sometimes it comes back to resolution 1: know who you are dealing with. The pussycat may turn out to be a tiger that you have by the tail.

Plan your Exit
Think about exit on the way in. What is the exit plan? Do the ages of the principals have any bearing? If outside finance is being obtained, when will they want an exit? Ensure that you understand and anticipate where tensions may arise and insert appropriate provisions to “drag along” minority shareholders on a sale. Look at share buy backs or outside capital to replace retiring shareholders.

Take the family out of the Business
Shareholder tensions can be at their most extreme in family businesses particularly where branches of the family don’t work in the business. Different agendas may emerge and you need to think laterally. Bring in external management. Keep the family issues separate from the business issues.

Plan for Succession
This may be different from planning for exit – there needs to be strong succession management in place. You don’t want to find there are few opportunities for exit because a buyer would inherit an unmanaged organisation. Be prepared to bring in external talent.

Keep Proper Records
Make sure that any transactions particularly on inter-company account are properly dealt with and that “loose” arrangements between directors and the company are discouraged. If examined later, they may be challenged on numerous grounds. Matters actioned on the basis of presumed trust are often questioned once parties fall out.

Manage issues to avoid conflict
Easier said than done but conflicts within shareholder groups are messy, expensive, time-consuming and can ultimately destroy your company. Seek alternative avenues for resolution including mediation or other conflict resolution.

Take Advice Early
Take advice when you think there may be an issue, not just when there is a problem.

Here’s to a prosperous 2010!

George Frier is Head of Corporate Law with McClure Naismith LLP

05/01/2010 15:30:00