Shareholder agreement key to avoiding family business disputes

This article was current at the time of publication.

There’s no doubt that going into business with family or friends can be rewarding, but if things sour it can quickly become incredibly difficult. 

Emotions run high with money and power and they’re two of the most common causes of shareholder disputes. 

Fortunately, accountants are across the finances of the business and potentially able to spot issues as they arise. Also, because they often have a relationship with shareholders in a family enterprise, they can provide a clear and independent third voice.

How a shareholder agreement works

According to family business adviser Dean Robinson CPA, the best advice accountants can give clients is to put a shareholder agreement in place. 

“I’ve seen a lot of business disputes over the years and something people don’t prioritise is a shareholder agreement,” Robinson says. 

“It’s a key thing to do but a lot of people don’t think they need one – until they do.”

A shareholder agreement can dictate what happens to the equity in a business when a partner or owner dies unexpectedly or can no longer operate it due to illness or permanent disability. 

“I’ve had [situations] where one of the partners suddenly passed away and there was no arrangement in place for how his family would be cared for,” Robinson says. 

“The financial responsibility fell on the shoulders of my client – his twin brother – which was a huge strain.

“Part of the role of accountants is being the key business adviser. They should be across all the areas in a business where they see that their clients are either exposed or need things sorted out.”

Fair share of the business

Many issues can cause business disputes, but commonly it’s because of a perceived imbalance of contribution, says Hall Chadwick’s Insolvency Partner Kathleen Vouris CPA.

“Issues arise when people feel they’re doing more than the other but the other is reaping just as much reward,” Vouris says.

“The second most common reason is that one shareholder wants to exit and the other doesn’t.”

As business advisers, accountants should be telling anyone going into business with a partner that they need a shareholder agreement from a lawyer outlining how they will resolve disputes, she maintains.

“If an agreement is not in place to deal with disputes, the worst-case scenario would be that a shareholder has no alternative but to apply to the court to seek the appointment of an insolvency practitioner because of concern about devaluing the business. However, this is the last card in the deck to use, as it could be very costly.

“The reality is that once the relationship is strained, cooler heads are not prevailing. Emotion takes out the rational and clear thinking that’s needed and undoubtedly, someone always wants more and that’s when they end up paying more. The costs will outweigh the benefits.”

Identify friction early and mediate

Seeing clients regularly is another good way to spot when things might be strained, Robinson adds.

“I had two friends in business [together] and just knew there was friction in the room,” he says. “I spoke to them separately and they agreed to work out a way to split the business. 

“The combined profit of those two separate businesses was higher than the previous year when they were one company, and that’s because one of the biggest financial impediments to business can be emotion.”

It’s important to note that the accountant should not act for both sides. If an accountant sees problems, the parties may wish to initially consider other options says negotiator and mediator Nicole Davidson, principal of Nicole Davidson Negotiation. 

“I think if accountants are getting a sense there might be something that’s starting to get a little bit off, they should be suggesting that the parties bring an independent person in to resolve the conflict before it escalates and the lawyers are called in.”

Mediation can also involve other influences, such as “quiet partners”.

“You might have two shareholders, but it’s their spouses in the background that can be creating some of the difficulties. They’re not part of a legal process, but they might end up being part of a mediated process.

“I’ve seen people who’ve been friends for 15 years and who are now not talking because they let things go too far, which can be sad to see.”

For those who baulk at the cost of early intervention or mediation that fails to entirely resolve an issue, the economic argument is clear. 

“The mediation process will often narrow down difficult issues,” Davidson says. 

“That means they’re going to have a faster, quicker legal process because they’ll have resolved some pieces of the puzzle.”