Rocky relationships in business

Posted on February 18, 2014 by FGL

I’ve felt like a bit of a marriage counsellor this week, where the underlying cause of the businesses underperforming – or not doing as well as they were – was down to the strained relationship between the business owners.

Without naming names, here are some of the interesting bits, and the lessons to be learnt.

Never invest in a business without a shareholder’ or partnership agreement and a clear business plan, even ( especially) if it’s with someone you know well. What starts out as a marriage made in heaven, can prove to be emotionally and financially draining if the business owners are not all clear about the direction and vision for the business, how they are going to achieve it and what their expectations of each other and the business are.

Mediating

This all sounds simple stuff but you’d be amazed at the number of times businesses fail because of a breakdown in communication and relationship because of separate ‘hymn sheets’ and the business is (literally) being pulled in conflicting directions. And if you’ve got any staff working for you, they can sense that something is wrong which can also affect their performance.

In most cases, it’s possible to act as mediator, to help them find the common ground again, and get their mind focussed back on success of the business, effectively getting them to thrash out an agreement or business plan before the horse has actually bolted, and get them back on track.

A complete breakdown?

However I did get asked for some advice from a solicitor friend of mine, where things were less certain – her client had invested in a business for a 50% shareholding and directorship, but the relationship had now broken down. The other director had removed her client’s directorship from Companies House, taken him off the bank account, and it was suspected he had moved stock out of the business.

So what could they do and how could they get their investment back ? Not a great situation, obviously – and in the absence of a shareholders’ agreement detailing the terms and conditions of the investment, the potential for full loss was quite high – as it is for any share investment – but there were a few practical things that could still be done to stand a chance of recovery.

What makes for a firm footing

  • Standard Memorandum & Articles of Association require a majority director/shareholder vote – so if it’s 50/50, one person does not have the power. Check out the validity of the Companies House ‘removal’ – it would need to have been done in accordance with the company’s M&A – or you could have recourse or get re-instated. The same could apply the Bank Account.
  • If you have actually put money into the company by way of Directors loan, you could sue for repayment ( especially if one of the conditions of the loan was that you were still a Director) and potentially petition for winding up. This would put control of Co assets in the hands of a Liquidator who may challenge recent asset disposals with recourse to the other Director.
  • If there are any other unpaid creditors of the company – you could persuade them to sue along the same lines of the above.
  • If the Co was wound up – and there were surplus funds at the end for shareholders – then you could get 50%. But run the risk of nothing being left in the pot – and with no where else to go.
  • If the Company is still viable and profitable – could you both take a step back, and firstly agree a dividend/repayment plan for return of investment and secondly accept that the business can’t continue with you not agreeing – and jointly go for a Members Voluntary Liquidation, a very tax efficient way of winding down a solvent company. They usually occur as part of a retirement or exit strategy, but work equally well in times of dispute. They are a much cheaper option than Compulsory Winding Up. And thirdly agree a share purchase plan. The other Director may be up for buying your shares. But be careful if he says he’ll do it at say 2% a month. Once he’s got 51%, he really has got total control of the company and can do what he likes (legally)
  • As a 50% shareholder, you do have recourse to petition for winding ip as an aggrieved shareholder – even though you are technically still a minority shareholder. It is possible but can be complicated, so give me a call if think more information would be useful

Obviously it’s far better if this situation can be avoided in the first place and a well-documented Shareholders Agreement or Partnership Agreement covering all the issues that could arise, will be a great start - the corporate pre-nup, so to speak!

For someone who specializes on the nuts and bolts of business performance, I have to say that the emotional and interpersonal issues are always the hardest to handle – but when it works out, and both the business and friendships are back on track, it’s definitely a good feeling.