Feb. 18, 2021

Shareholders clauses strengthen business, avoid litigation

As Published in Florida Trend

Partners often go into business together with the best of plans. But what happens when those plans go awry? Ideas for the business’s future may stray in different directions, partners may accuse each other of self-dealing, or one may give a spouse or family member an ownership stake — and a say in the business’s future. 50/50 disputes, selling or bequeathing of shares or ownership, minority ownership rights, and other such issues are not wholly unpredictable. Yet just like credit and debt, tax liabilities, or competition and market forces, shareholder disputes can have a material impact on the business.

Most shareholder issues should be addressed in a business’s governing documents. If not there from the outset, they can be included as the business matures.

Taking a proactive approach to addressing possible shareholder issues, in addition to shareholders’ reactive rights, can help clarify the business’s response to future possible conflicts. This can help avoid costly and lengthy litigation or judicial dissolution. 

A few considerations …

Buy/sell agreements. This provision establishes what happens if one party wants to sell their interest and exit the company; transfer ownership of shares, even to family; or bring on a new partner, for example. In an effort to avoid litigation and judicial dissolution, the agreement can force a buyout after an appraisal to establish the business’s fair market or net book value.

Tie-breaking mechanism. Organizations with 50/50 partnerships or any even-numbered and equal-stake ownership group need a way to address, negotiate through, or break a deadlock. The corporate documents can require any such matter first go to mediation, or shareholders engage a third party, such as an agreed-upon member of the executive committee, an attorney with no ties to the company, even a mediator, to serve as the tie-breaker.

Non-compete clause. Imagine two 50/50 owners are in dispute, and before resolution, one moves to open or join a competitor, or while being paid out his or her interest opens a competitor across the street. While owners have fiduciary obligations to each other, an agreement on the issue can provide certain immediate relief for the company and its owners, like injunctive relief and attorney’s fees. While non-competes are unenforceable in certain industries, the clause could compel partners to consider before acting on the legal and financial implications they may face.

Talk to counsel. Whether with general or outside counsel, ask to review the current operating agreement for clauses that protect the company during shareholder disputes. Possibly engage an experienced corporate transactional attorney to put protections in place.

Such clauses can also be useful if ownership is approached about an acquisition. Prospective buyers often review the operating documents before closing to see how the company’s interests are being protected. This can include non-compete clauses or evidence of prenuptial agreements where needed, especially for executives who will remain after an acquisition or for then-existing disputes.

Most importantly, have that hard conversation with your partners. Once in place, clauses protecting shareholder rights can strengthen the business, while hopefully just collecting dust in the file cabinet.

Categories


Fresh


Bankruptcy May Not Solve Your Clients' Problems

With the increase and proliferation of Native American and other casinos, as well as the advent of internet sports gambling, many of those suffering substantial losses are turning to a bankruptcy filing in order to obtain a “fresh start” by filing a Chapter 7 liquidation bankruptcy proceeding. Unfortunately, for those individuals who fail to meet the strict standards relating to obtaining a discharge in bankruptcy, a foray into a bankruptcy proceeding may turn out to be a journey in quicksand.

Competition for Legal Talent Drives Nail into Coffin of Five-Day, In-Office Work Week

Tripp Scott director and chief operating officer Paul Lopez initially asked his attorneys and staff to return to the office full time in July. Then, the delta variant hit, and the 48-lawyer law firm readopted its hybrid working model.

Nowadays, as Lopez plans for the future of Tripp Scott’s in-office working policies, he weighs aggressive competition from rival firms in his decision of whether to eventually ask everyone to return for a five-day, in-office work week.

“We have been successful in retaining employees and paralegals and associates, even though we know recruiters out there are trying to recruit them, because they know they have flexibility,” Lopez said in an interview. “I think that if we went back to five days (in-office) per week, that could have consequences for us because of how actively our competitors are trying to solicit employees with promises that they could work remotely. We’re trying to listen to the marketplace.”

Henny L. Shomar Joins Broward Public Library Foundation’s Board of Directors

FORT LAUDERDALE, Fla., October 21, 2021, Tripp Scott today announced that Henny L. Shomar, a director with the firm’s family law and commercial litigation practices, was appointed to the Broward Public Library Foundation’s Board of Directors. The board members serve as active ambassadors for the Library Foundation and are involved in its mission through board meeting attendance, committee work, support and attendance.

Start a Conversation




The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.