In our commercial litigation practice we have seen numerous disputes among business owners, partners and corporate shareholders that could have been avoided if the parties had signed a well thought-out Agreement at the outset of their relationship.
Oftentimes this issue arises when family members, close friends or close business associates decide to start a business together. However, regardless of how close of a relationship you have with your business partner, it is in everyone's best interest to set forth the precise terms of the business relationship in a written agreement.
If the business entity is a corporation, the document would be called a Shareholder or Stockholder Agreement; in a limited liability corporation, it would be called a Member Agreement; and in a partnership, it would be a Partnership Agreement. For the purposes of this article, we will refer to the document as an Agreement.
To begin with, the Agreement should specify the capital contributions and ownership interests of all investors. There have been many examples of minority shareholders or partners being locked out of a business and then having their ownership interest disavowed by majority shareholders taking advantage of the absence of a written agreement. While the absence of a written Agreement does not foreclose an owner from proving his ownership status through other evidence, costly litigation with no guaranteed outcome is often required.
A well-drafted Agreement should also cover the spectrum of issues that could arise including, among others: (a) issues concerning management; (b) what happens if an owner wants to sell or transfer her shares; (c) what happens if an owner dies or becomes disabled; (d) how profits and distributions are handled; (e) whether owners can be called to make additional capital contributions; (f ) whether owners are indemnified for personal liability; and (g) issues concerning the potential dissolution of the company.
Finally, the Agreement should contain provisions for the resolution of any future disputes between owners. This includes, among other things, selecting the forum for any such disputes. For example, the owners should decide if they want disputes determined in a court or through arbitration with an entity such as the American Arbitration Association. It is often thought that arbitration is the cheaper and more efficient option, but that is not always the case. Choosing the wrong forum for the resolution of disputes could end up costing owners later. For example, in the American Arbitration Association, if one party fails to pay its share of arbitration costs, the arbitration is discontinued unless the other party fronts the costs. However, a well-written Agreement could avoid this potential pitfall.
If you need guidance in the creation or review of an Agreement, please call our office.
Jordan M. Freundlich is an attorney in Vishnick McGovern Milizio LLP's Litigation Practice Group. He can be reached at JFreundlich@vmmlegal.com or at 516-437-4385, ext. 142.