Case study: What do you do when a business partner skips the country?

Case study: What do you do when a business partner skips the country?

In an earlier post, I explained business relationship documents and their role in protecting a business from the risks of disputes between co-owners. This article takes that a bit further. I’ve set out below details of a real world business dispute. I have also identified how this client would have benefited from having business relationship documents governing their affairs.

First, a disclaimer: the case study relates to an actual client that I have assisted. For obvious reasons, I have altered some of the facts to ensure that my client cannot be identified.

Background

When you get into business with another person, one of the fundamental assumptions that you will make is that you will both be around to run the business. So, what do you do when you arrive to work one day to find an email in your inbox from your business partner telling you that they’ve left the country? Even worse, the email goes on to say that while they’ve resigned as a director, they intend to remain as a shareholder of the business and expect to receive their share of profits while away. One of my clients found themselves in this situation early in 2018.

The role of relationship documents

My first question in any business dispute is always the same: when you established your business, did you document your relationship in an agreement? Unfortunately for this client, the answer was an expected and resounding “no”. This would have been an easy dispute to resolve if an agreement had been in place. This is because a well drafted relationship document would almost certainly include provisions surrounding:

  • participation in the business and fulfilling certain roles; and
  • consequences for abandonment of the business.

Those clauses, and that hypothetical agreement, would have allowed the client to trigger the automatic buy-out of the absent party. He’d still be left to run the business alone, but at least he would also own the entire business outright.

How was the business dispute resolved?

The fact that the business partner resigned as a director left our client in complete control of the business. This gave us options.

The first thing we did was have the business valued by an independent valuer. The valuation gave us an indication of the market value of the business. Our client proceeded to sell the business, at market value, to a newly established entity which he alone owned. The proceeds of the sale were then split equally with his business partner.

While this worked out in our instance, the strategy involved considerable risk (which the client was happy to take). As the sole director, our client had statutory duties to act in the best interest of the shareholders, and the sale of the business in these circumstances could have landed the parties in litigation arguing over anything from the accuracy of the valuation to the validity of the sale.

Key points

There is often no rhyme or logic explaining how and why business disputes happen. Seemingly best friends often find themselves bitterly opposed, sometimes over the most trivial of matters. While we can’t always stop disputes from happening, business relationship documents can help resolve disputes in a speedy, cost-effective and structured manner.

If you would like to discuss implementing relationship documents in your business, please get in touch.