Protect Business from Emloyees Taking

During the past year I’ve provided advice to numerous business owners in disputes with a co-owner.

Generally the business owners operated by way of partnership or as shareholders of a private company. However, the business structure used was not their problem.

Their problem was that they had no formal mechanism in place to assist them to resolve disputes between them… and that generally means you’re off to court, many thousands of dollars worse off, with many lost hours and increased levels of stress.

Their situations would have benefited from some simple but effective provisions in either a partnership agreement or shareholders’ agreement providing for the following:

  • A deadlock provision. For your typical two-shareholder company, a “shotgun” provision may be appropriate. Such a provision works to provide either shareholder with the opportunity to break a deadlock by offering to purchase the business share of the other owner, on terms set out in the offer. That offer triggers a right for the other shareholder to purchase the share of the party making the offer on those same terms. However, if the offer is rejected, the rejecting party must sell.
  • An exit provision. Typically such a provision will allow a co-owner to offer their share of the business for sale to the other co-owner/s and, if that offer is not accepted, to sell to a third  party for no better price than that offered to the co-owner/s. If no sale eventuates they are able to wind up the company or partnership.
  • A valuation provision. A provision that provides for a pre-agreed valuation method.
  • An alternative dispute resolution provision. No different to many such provisions you’ll see in any well- drafted commercial agreement. My preference is to provide for mandatory mediation as a pre-requisite to any litigation.

Of course these types of provisions won’t be the panacea for all disputes, but they will at least provide possibilities for a solution.

It’s probably not a bad idea to read your partnership agreement or shareholders’ agreement again, and do so with this question in mind…

“If I get into a dispute with my business partner, how do I resolve it in accordance with our agreement?”

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