Setting up a business can be an extremely difficult undertaking and for the unititated it can be a complete minefield. It is therefore not uncommon for people to go into business with friends or family so as to spread the burden and the risk. This however, brings with it a new set of challenges. For whilst everyone gets along when the business is in it’s infancy, things can quickly unravel as soon as the business starts to prosper.
A few years ago we had a client who was put into just such a situation. He had gone into business with a very good friend offering brokerage services. The arrangement was that the friend would provide the finance and our client did all the work, the friend was in essence a ‘silent’ partner. The profits were split equally. For over 20 years business was steady but could never be described as ‘booming’. That however changed following a particularly successful marketing campaign which suddenly saw the fortunes of the company doubling year on year for several years in a row.
At this point it was clear that the ‘silent’ partner saw an opportunity to take the business for himself. Our client’s health had started to fail and he was spending less time at the firm’s offices. The silent partner used this rouse as the basis on which to unilaterally take steps to remove our client as a director of the company and ultimately shut him out of the operation. In that single move 30 years of friendship was brought to an end.
The silent partner moved quickly to then appoint members of his own family into the business. The takeover was complete.
The striking feature about this situation was that despite the number of years that the business had been trading, there was not a single written document setting out the basis of the relationship between the parties. This meant that there was no contractual basis on which to settle the dispute and our client was forced to have to make a claim for unfair prejudice under the Companies Act.
Although a satisfactory resolution was reached in the end, it required court action which involved a lengthy hearing and of course substantial costs – all of which could have been avoided had there been a shareholders agreement in place.