When you first start a business, you and your fellow shareholders typically begin the journey in complete alignment. This includes a strong sense of trust in reaching your mutual goals, and, most importantly, everyone shares the same vision for your business’s future. This sense of harmony allows the initial partnership to be a strong foundation for the business to grow from.
However, even if you and your shareholders generally remain in agreement throughout your entire professional relationship, there is a high probability that there will be smaller conflicts or misunderstandings along the way, whether these are regarding roles, responsibilities, goals, or anything else. Without the right structure in place, even the strongest of relationships can come under strain.
Why Conflict Might Occur
Just like in personal relationships, conflict can arise from the smallest of situations. Working alongside your fellow shareholders in close proximity allows greater opportunity for tempers to flare and tensions to rise.
In business, disagreements can stem from myriad reasons. There are all the usual professional concerns, including misaligned expectations, unclear roles or financial pressure. However, the impact of personal life events (such as illness, divorce, etc) can also translate into workplace dynamics, therefore fragmenting the sense of alignment you are used to.
All this is to say, shared ownership works great until something changes. This is why it is essential for preparation to be made in advance, so that changing circumstances do not throw all parties for a loop and result in unstable business operations.
The Cost of a Dispute
The cost of a dispute can be high if you have not properly prepared for such an event. If we liken this conversation to personal relationships again, it is common knowledge that during an argument with a family member, significant other or friend, you can either say something you don’t mean or make a snap decision under pressure that you don’t necessarily agree with once tempers have calmed and emotions have steadied.
In business, damage to relationships does not just affect the relationship between the parties in conflict; it will also have a significant impact on the business as a whole. As a shareholder, it is your responsibility to ensure that there is a sense of cohesion and alignment with your fellow shareholders, and decisions aren’t made when emotions are at their highest. This can seem like a tall order when disputes arise, which is why planning ahead is key.
The Protection of a Shareholder’s Agreement
This is where a shareholder agreement comes into play. A shareholder agreement limits disputes by defining each shareholder’s rights, roles, and responsibilities, and outlining governance rules clearly to ensure that everyone is on the same page.
A shareholder agreement should be prepared early in the business in order to provide clarity and structure that have been agreed upon from the outset. Creating a shareholder agreement early means that quick decisions made in the heat of the moment are limited, and the business can continue to run smoothly.
Ultimately, there is no escaping business change. It may come when you least expect it, but businesses that plan ahead for it are in a far better position to maintain stability and protect relationships, no matter what situation unfolds.
Create a Practical Checklist to Avoid Shareholder Disputes
Your shareholder agreement should be robust and contain as much information as possible to limit potential disputes in the future. Some points to address include:
- Have you clearly defined roles, responsibilities and decision-making authority?
- Do you know how the business would be valued in an exit?
- Is there a process for resolving deadlock situations?
- Have you planned for unexpected events?
You may be thinking that a shareholder agreement isn’t necessary for your business, that there will be no disputes to warrant it. However, if you are wrong, then it may be too late to prevent conflict by not putting a shareholder agreement in place sooner.
How Can fds Help?
fds is well-equipped to assist you with any shareholder agreement questions. If you would like further information on the services fds provides in this area, please contact us for a confidential discussion.