Think of a Shareholder Agreement as Preventative Medicine
You’re in the early stages of building a business. You have a partner who you’ve known for some time now and you couldn’t be more thrilled to enter into what will certainly be a mutually beneficial business relationship between the two of you.
It sounds wonderful. What could possibly go wrong?
Let the recent collapse of the renowned Heenan Blaikie law firm be a lesson to you. Even after 40 years, 500 lawyers on staff and the involvement of prominent political names including Pierre Elliott Trudeau, Jean Chretien, Pierre-Marc Johnson, Marcel Aubut and Michel Bastarache, the firm has been dissolved and it leaves behind a legal community beside itself with shock.
The “Honeymoon” Phase
Intimate relationships always have a “honeymoon” phase and business partnerships are no different. Problems have not yet risen to the surface, you cannot imagine something going awry, and you’re anxious for business operations to get underway. Why waste time and money drawing up a lengthy shareholder agreement?
Because it just may be your saving grace in the end.
Plan Ahead and Set Rules Now
The best time to handle a dispute is before it happens in the first place. Calmness and rationality don’t tend to be our strongest suits in the midst of adversity. On the other hand, if you and your business partner discuss, identify and define specific rules in writing, if and when disputes arise in the future, their resolution will be fair, timely and straightforward.
- How will the business operate?
- How will responsibilities be divided among you?
- If death should occur, what happens to the business and the living partner?
- If one of you should become disabled, how will the business proceed?
- What will happen if the business becomes short cashed?
- How much money can one partner invest into the business without informing the other?
- Who signs for cheques? One of you? Both of you?
Preventative is Better than Reactive
It is difficult to act in a fair and equitable manner when you are frustrated and angry. A high stress environment is the perfect foundation for irrational behaviour that may prove detrimental to the health of your business relationship.
By taking a realistic approach to business partnerships, you come to terms with the fact that there are bound to be differences and disagreements between you – it’s how they’re handled that matters. Right from the get-go, arrange a meeting, speak candidly and pragmatically and draft a shareholder agreement that you’re both comfortable with. Not only does a shareholder agreement protect your best interests in the long run, but it also establishes an honest, clear and equitable business relationship between you and your partner.
A good advisor acts as the facilitator of a discussion that allows you to speak openly on issues you otherwise would have avoided.