Call Us At 519.672.5666
Insights & Articles
The business prenup you didn’t know you needed
This article was originally published in Guelph Today and can be found here.
Alexander Verrilli, litigation lawyer at McKenzie Lake Lawyers in Guelph warns that without a shareholders’ agreement, a breakup between business partners can spiral into a legal battle as emotional and costly as a divorce
Starting a business with partners is a lot like getting married – everyone’s excited, optimistic, and convinced that nothing could possibly go wrong. But just like a marriage, a business relationship can go through tough times. A shareholders’ agreement can protect the partners’ interests and be the business prenup you didn’t know you needed.
A shareholders’ agreement is a contract between owners of a corporation, a rulebook that outlines how a company’s shareholders will interact, make decisions, handle disputes, and what happens if a shareholder wants out. Alexander Verrilli, senior litigator at McKenzie Lake Lawyers in Guelph says, “A shareholders’ agreement is especially important in family businesses or when friends go into business together, because personal ties can make business disagreements even messier. I think of a shareholders’ agreement like a marriage contract. You can settle a dispute through an angry divorce in the courts or you can have an agreement beforehand that outlines how disputes will be resolved.”
When there is no Shareholders’ Agreement
Without a shareholders’ agreement in place, even simple decisions can turn into prolonged and painful battles. Shareholders’ agreements are not just for large corporations. Small and medium-sized businesses, especially those with only a few shareholders, have just as much, if not more to lose if and when disputes arise. Whether it’s over strategy, finances, or roles within the company, disagreements are inevitable. The question is whether those disagreements escalate into full-blown legal wars or are dealt with in a structured, agreed-upon way
A shareholders’ agreement might not be the exciting part of launching a business, but it’s certainly one of the most crucial. When there is no roadmap for resolving conflicts, disputes can quickly escalate into lengthy litigation that can drain resources and destroy relationships beyond repair. Verrilli says, “From my experience, people who don’t have shareholders’ agreements, often end up in court with a litigation lawyer like me to resolve these disagreements. It can get terribly messy and feel more like a family law divorce in many cases, rather than a corporate dispute. Meanwhile, the company can stagnate, reputations can be damaged, and the original dream behind the business can fall apart.”
An “exit strategy” is crucial
An “exit strategy” in a shareholders’ agreement is a safety net when one of the owners wants out. Without an exit strategy, things can get ugly – fast. In Alexander Verrilli’s experience, the most crucial and frequent dispute that arises is when people don’t want to work together anymore, but can’t agree who must leave and who gets to keep the corporation. He says, “Without a shareholders’ agreement that includes an exit strategy, there is no automatic way to get out of owning your shares, unless someone is willing to buy them.”
A well-crafted agreement can include a “shotgun provision” which may be used to force a partner to sell their stake or buy out an offering partner. But if you don’t have a shareholders’ agreement Verrilli says you may be out of luck. “Unless you can prove wrongdoing or what the law calls “oppression” on the part of the other shareholder and irreversible harm being done to the company, the court will take the position that your shares are your shares and you’re stuck with your ownership position. If a shareholder simply wants out of their investment, they should have bargained for that at the beginning by creating a shareholders’ agreement.”
Litigation may be the only option
When there is no shareholders’ agreement in place and a dispute arises, court often becomes the only way out and that has its risks. Without a clear shareholders’ agreement, the only alternative is to hire a litigation lawyer to seek a remedy from the court. Verrilli points out, “The sad thing is that often to get that remedy, the litigation begins to focus on a litany of grievances that the person has with the other. Acrimonious litigation can lead to fractures in friendships and family relationships.”
Litigation is risky because it could mean that the court orders one shareholder to buy out the other at fair market value or it could result in the business being wound up altogether. It can be stressful, expensive, and deeply personal. That’s why having a solid agreement in place can save your business and your peace. Verrilli adds, “It’s one of those things, just like marriage, where it’s tough to have a conversation to create a marriage contract because it can seem like you don’t believe in the relationship, you don’t believe in the business, and you don’t trust your partner. But it’s a conversation you need to have because it’s best for everyone.”
Speak to a lawyer
Most of the litigation that Alexander Verrilli deals with involves helping people who either don’t have a shareholders’ agreement or they have drafted an agreement themselves. But such contracts are often ambiguous and the parties end up fighting over what the agreement means. He says, “My recommendation to anyone entering a business partnership or a relationship with multiple owners in a business, is to contact a corporate lawyer at the outset to get a properly drafted shareholders’ agreement. It will prevent stress, cost, anxiety, lost sleep. and possibly years of litigation if things go sideways.”
One of the best steps you can take before opening a business is to contact a lawyer to get legal advice. Verrilli adds, “Sometimes people are not aware that they need such an agreement to protect their interests or they incorporate themselves online to avoid the legal fees.”
Alexander Verrilli encourages anyone incorporating a business to get legal advice at the start and if the business is already incorporated, he says, “I would highly recommend that the owners get a shareholders’ agreement. It’s never too late to protect their investment and their relationships. It’s a contingency plan you hope to never use, but absolutely need to have. It’s the best investment you can make.”
Contact Alexander Verrilli (519) 826-4333 x7617;
Email: alexander.verrilli@mckenzielake.com; Website: https://mckenzielake.com
