As an Insolvency Practitioner, I often come across situations where there has been a falling out amongst members of the Board and/or shareholders. The individuals involved have often spent a lot of time and energy in dealing with their dispute and may have taken their eyes off the business. This can cause a lack of direction and management of the company which can lead to all sorts of problems such as loss of turnover, lack of staff engagement, disunity and, in some cases, failure of the business.
Where the solution is to part ways and one party seeks to extricate themselves from the business, this in itself is not necessarily straightforward.
Just like in the early throes of a relationship, when starting a new business venture, disputes amongst the Board Members may well be the last thing on everyone’s minds. However, what happens when the thrill of the honeymoon period wears off and day-to-day reality kicks in? Thinking about what could go wrong and protecting business owners against the unexpected could be time well spent to help reduce the distress and disruption which could arise at a later date.
What can business owners do to protect themselves?
A shareholders’ agreement sets out the relationship between the shareholders, ownership of the shares, how the company will be managed and seeks to provide protection for the shareholders. It might include provisions for a shareholder leaving the company, including who purchases their shares and how the shares will be valued. It may also set out a route to resolve any deadlock which occurs. The advantage of a well-drafted shareholders’ agreement is that it should set out expectations from the outset, reducing uncertainty arising from disagreements at a later date.
Business owners should consider what controls are set up to protect against mistakes and even fraud within the company. Trust is an important part of going into business with others, but that does not obviate the need for good processes. In fact, strong controls should enhance trust and free business owners up to focus on areas where they can add value and grow the business. Controls do not have to be burdensome; an example could be something as simple as authorisation limits for payments out of the bank account and requiring more than one person to approve larger payments.
Good communication is an essential element of any partnership or business. Breakdown in the relationship between the directors or managers of a business can lead to untold misery. Getting into the habit of holding regular Board Meetings provides a good platform to consider the strategy and to have a healthy discussion, as well as an opportunity to make and record decisions. It may be helpful to invite an advisor or even a non-executive director to attend, to help meetings stay on track and offer a level of independent insight, which can be invaluable.
All relationships need work to keep them strong, and business relationships are no exception to that. Time spent setting up good governance of the business should enable the rewards to be reaped later, even, or especially, when things don’t go according to plan.
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