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Stabbed in the Back: Shareholder Security for Tough Times

As professional advisers, helping our clients avoid some of the pitfalls of the current economic environment is good for their businesses and ours.

For example, even in good times jointly owned businesses fail because of problems between the owners. But the risk increases exponentially as times get tougher. ‘Issues’ which were previously overlooked become problems; attitudes become less conciliatory; and problems become more difficult to resolve by agreement. When this happens, it’s not uncommon for relationships to deteriorate to the point that someone needs to leave the business and/or sell their shares.

This often leads to another problem – the seller has an inflated idea of what the shares are worth and the buyer (invariably one or more of the other shareholders) has the opposite view. Unless this is settled by agreement, a court will usually order the company to be wound up – a very costly outcome!

Such problems can easily be prevented, but most people are not even aware of the risks let alone how to prevent them. This is where professional advisers can help by ensuring that all their clients who are in business with other people, or just one other person, know how critically important it is to have a “stakeholders’ agreement” (so called because it applies to all forms of business ownership, not just shareholders in a private company).

Let’s look at how it would deal with the problem above. If one of the owners needs to sell (to resolve a dispute or for other reasons) and agreement on price cannot be reached, our normal stakeholders’ agreement provides that the price will be determined by the company’s accountant. This is just one example of the role an accountant can play in breaking deadlocks.

Some people have said to me in the past “I trust [my partner] completely” or “But he’s my brother, why do we need a written agreement?” In fact, it is even more important for people with a close friendship or family relationship with a fellow owner to enter into a stakeholders’ agreement. This is because the types of disputes which occur between business partners not only have the potential to wreck the business, but also the relationship. I have seen it happen many times. A stakeholders’ agreement will protect both.

Ideally it should be in place before the business starts but, if this didn’t happen, it should be done now because the level of risk will rise as the financial crisis flows through into the broader economy.



The above article was written by Russell Wheeler, of Lexxon Lawyers Online. If you would like a checklist to assist with this, please complete the “Contact Lexxon” page at www.lexxon.com.au and ask for their stakeholders’ paper.