Commercial Law

Breaking Up Is Hard Is Hard To Do

February 7, 2019

Breaking up (especially with one’s business buddies) is hard to do (or – don’t trust your friends!)

During straitened economic times, it is an uncanny coincidence that director, shareholder and partnership disputes arise more frequently. This is because the protagonists take stock of their positions, become less trusting of their counterparts and / or wish to resile from financial commitments and reduce risk.

I present below some useful information on how to prevent rather than cure; and then how to cure if the proverbial hits the fan.

Some top tips to make sure that everything is in order at the very start of a business relationship, be it by way of partnership, company or joint venture.

  1. Sit down and be honest with each other at the start: think about allocation of risk; who is putting in what money and what (if any) responsibility they are taking; who is doing what work; who is bringing in clients; who is in charge, etc. Be particularly clear about profit-sharing otherwise the law may govern what each party receives
  2. Distill this into an agreement, being transparent and giving relative weight to these factors – otherwise resentment will be sown at an early stage
  3. Importantly, think about exit right at the start
  4. Critically, include deadlock provisions – eg have a casting vote
  5. It sounds simple, but ensure that the agreement and the company documentation and Companies House reflect the actual position, such as shareholdings and directorships
  6. Include a dispute resolution mechanism

Typical problems and how to resolve them

  1. Deadlocked companies – where two shareholders have equal voting and management rights but are no longer able to work together. Usually these are resolved by way of an unfair prejudice petition under Section 994 of the Companies Act. To succeed, the complaining shareholder must demonstrate fault on the part of the other shareholder (ie that that the company’s affairs are being conducted in an unfairly prejudicial manner). Of course, this is absent any provisions in the articles of association or shareholders’ agreement to break a deadlock (this is why they are so important!). There is no such thing as “no fault divorce”
  2. Alternatively, an application can be made under Section 122 of the Insolvency Act 1986, on the basis that it is just and equitable that the company in question, even though solvent, should be compulsorily wound up
  3. Section 994 petitions are more common where a minority shareholder can demonstrate that their interest is being unfairly prejudiced by the inequitable behaviour of the majority shareholder (note that a breakdown in mutual trust and confidence in itself is not sufficient)
  4. Sometimes, a derivative action is brought – this is a claim by a member (shareholder) of a company on behalf of the company for a wrong against the company which the company is unable or unwilling through its directors to pursue itself. Section 994 actions and derivative claims can be difficult to decide between

Out of court solutions

  1. Chairman’s casting vote
  2. Outsider’s vote
  3. Reference to shareholders
  4. Mutual put and call options
  5. Arbitration or expert resolution

Conclusion

Prepare for the worst at the outset and be honest as to the relationship and expectations, as what seems like a rosy relationship can quickly turn sour, often because of (rather than despite) this lack of transparency. If things do start to look problematic, or you would like more general advice, please email me at enquiries@jarmans-solicitors.co.uk  or call me on 01795 472291