Business relationships go bad. Unfortunately it happens. People who set out with the best of intentions and the best of friendships can find themselves locked in bitter disputes over business assets. This can be a result of changes in their lives, their relationships or the business itself, and often cannot be foreseen.
As Business Lawyers we often find ourselves, for want of a better word, "nagging" our clients about putting agreements in place with their business partners, such as partnership agreements or shareholders agreements. These agreements cover what is to happen if unforeseen events occur or things go wrong. Some of the reasons given by clients as to when our advice is not taken include... "it's not something we need right now"..."it's not in our budget"... "We are good friends, we would never do the wrong thing by each other"... "we have already agreed what we will do if something changes, we don't need it written down"... "We're too small to need something complicated like that"...
A recent case before the courts is showing why, no matter how strong the relationship, it is vital to have agreements in place with your business partners. Grill'd started as a single suburban burger restaurant. It was founded by three friends. It grew into a vast chain of restaurants now valued at over $300 million (although that valuation is in itself part of the dispute).Two of those friends remain in the business and are now involved in a significant legal battle.
The issues in the dispute are wide ranging. The value of the business is one issue. Oppression of a minority shareholder is another. A third is the accusation that shareholders are involved in rival businesses. Side issues include scandals regarding underpaying workers and personal conflicts between the two owners that seem on the surface unresolvable.
The Grill'd dispute will be resolved one way or another, through a settlement negotiated between the parties or a decision of the court. The path to that resolution, however, is a very expensive one. Both parties will have significant legal fees, both parties will spend significant amounts of time on the dispute and away from their business, and the result will be a very unfortunate blight on the name of their business.
It is not evident from the reports what agreements were in place between the parties; however, a well structured Shareholders or Partnership agreement can go a long way in reducing the risk of such a dispute escalating to court proceedings.
Shareholders Agreements and Partnership Agreements can be prepared to set out how businesses will be valued if a partner wants to leave, the rights and obligations of minority and majority shareholders, as well as what shareholders can and can't do outside the business (for example – can they set up a rival business, and if so, in what circumstances?).
The time to set up the agreement is when the parties are still getting along, but which covers a time when things aren't so good. Preparing for the worst doesn't mean you can't be good friends, it just means you are better business people.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.