It’s not unusual for one person to own a business, and their spouse or partner to also have shares.
This can lead to a potentially difficult situation if the couple then split up. Here, Michael Shroot, Chief Executive Officer and solicitor at WHN, looks at what can be done to protect a business.
When can this happen and what should people do?
This scenario is one we see most often among smaller, owner managed businesses which may be husband and wife owned, where both parties are directors and shareholders who fall out.
It is important for business owners to act quickly with three clear aims: protect the company, understand your rights, and protect your interests.
Circumstances can change, so periodically any corporate documents that are in place should be thoroughly reviewed.
These might include shareholder agreements and director service contracts. It is these documents that should govern the relationship between the business partners as shareholders, and between the company and the directors.
The corporate documents should deal with matters such as what happens to the shares if a director leaves, how the shares would be valued, who can buy them and the timescales involved. Also, they can deal with how to remove a director, what procedures to follow after a dispute, and therefore avoid, as far as possible, the business stalling.
If you don’t have anything in place, it is never too late – prevention is better than cure, and WHN has specialist qualified solicitors in its corporate/commercial team who can advise on how to tailor such documents for your needs.
Save the business – don’t damage it
If the dispute is ‘live’, focus on saving the company and / or getting the best value for your shares. The worst thing to do, whoever is leaving the situation, is try and deliberately damage the business. This is self-defeating and can even cause the business various issues, such as:
- Breach a variety of contracts and ruin yours and the company’s reputation in the marketplace
- Give rise to personal liability through a breach of the Companies Act or outstanding personal guarantees
- Result in you being banned to act as a director for many years
- If you deliberately take money from the company accounts, that could be a criminal offence
- It could cause the company to become insolvent
- It could mean you both get zero value for your shares;
- Your other shareholder(s) may take you to court because of your actions to obtain an injunction to prevent and restrain your actions; this could be costly in terms of having to pay out for yours and your shareholders’ legal costs.
How can the business be protected?
Assuming there is a fall out from the breakup, then consider the pinch points in the business and protect them. For instance:
- The bank: protect not only the monies in an account but warn the bank to avoid monies being stolen, note this could result in the account being frozen
- Accountants: keep accountants in the loop, ensure they are aware of a looming dispute and that they should not take instructions from one director only
- Secure the companies house account
- Factoring company: many businesses factor invoices out, if the bank account is not secure, freeze any payments, or avoid payments being hijacked elsewhere
- Clients and customers: Consider what contractual duties must be fulfilled, and how a fall-out will risk those relationships and how they can be protected
- Consider a plan B: if the company does fail, how will you continue in any type of business and do so without breaching duties to the existing company.
The earlier you instruct specialist commercial dispute resolution solicitors the better. Many disputes are resolved without going to court, through alternative dispute resolution including round table discussions or mediation.
However, with a solicitor on board at an early stage you can, if necessary, prepare to go to court where urgency requires an injunction or other court orders to protect the business, your shareholding and its value.
Michael Shroot is Chief Executive Officer and a solicitor based at WHN’s Bury office. Michael specialises in commercial dispute resolution, advising on complex and high value disputes for all sizes of businesses, with a focus on employment law, director/shareholder and contract disputes. To contact Michael, call him on 0161 761 4611 or email email@example.com