Litigation Learnings Series
Practical tips on how to avoid
being caught up in litigation
By Paul Vincent
Paul Vincent has been working in the litigation field for over 30 years and during that time has been involved in hundreds of very costly disputes, many of which could have been avoided. This series of short articles draws on Paul’s litigation experience and provides practical tips on how to avoid being caught up in litigation. Each topic will be supported by an actual case study that will demonstrate the importance of being “Litigation Smart.”
The importance of a Partnership/Shareholders/Unitholders Agreement when going into business
So, you are going into business with somebody for a special project with a limited life or a long-term venture. The start of any new opportunities are certainly exciting times and of course, you know things will go well and the eagerness to get cracking is overwhelming. However, before you go too far, there are a few things you need to know.
Of course, you have done all the cash flow projections and profitability analysis and you are confident that the venture will be a huge success. The early days are exciting but they can soon turn sour if you don’t stop and ask yourself a number of questions, such as:
- Under what structure is the business going to operate?
- How do the parties get in and how much do they need to contribute in cash, other assets or Intellectual property?
- What percentage of the business does each party get for that contribution?
- What are the rights, responsibilities and obligations of the parties while they are in the business?
- What are the obligations regarding any future funding? Will it be debt of equity, or a combination of both?
- Is there to be remuneration paid to the parties and how is that determined?
- How and when are profits shared?
- How long does the business intend to operate?
- How to exit the business by desire/expulsion/death?
- What mechanism is in place to deal with disputes?
You may have the answers to some of these questions, but there will be others where you will need assistance.
You and your partners need to agree on how these and other specific questions relevant to your particular business or venture will be answered and the pace for that to occur is in a well drafted Partnership/Shareholder/Unitholder/Joint Venture Agreement.
You must get advice from a good lawyer and a good accountant. I stress the word good, as getting the right accounting and legal advice in the early stages is critical to the ultimate success of your business. Make sure you seek professionals experienced in this area. Proper advice up-front on structuring and legal issues will pay dividends down the track.
The purpose of an Agreement is to protect your investment, determine how the business is to be managed, clearly define the rights, responsibilities and obligations of the parties and determine the mechanism should any disagreement arise.
There will be disagreements and there will be disputes. If they are not resolved by discussion, negotiation and compromise, then there needs to be a dispute resolution clause that takes the pain out of a dispute.
Sad case study
A professional services firm consisted of 5 partners each servicing essentially their own clients each with a significant amount of working capital invested in the practice. There was no partnership agreement.
One partner decided to leave the partnership and requested to be paid his capital and current accounts upon his departure. After leaving, the exiting partner “poached” most of his fee base from the business and continued to press for settlement of his capital and current accounts. Of course, the remaining partners were not that keen to let him get away with 20% of the practice so a dispute soon escalated into all out warfare. Neither party gave an inch and it wasn’t long before lawyers and forensic accountants got involved. $450,000 in costs saw the dispute finally resolve in a settlement that a $10,000 partnership agreement could have produced, if there was one.
A partnership agreement would not have prevented the dispute but it most certainly would have assisted in its speedy resolution.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.