Is a 50/50 company a good idea?
When two people start a business, they often split the ownership of the company 50/50 because it seems the obvious and fair way.
In an ideal world, both owners will invest and contribute to the business in equal shares. Not only because it’s a joint ownership, but because both parties will have worked hard to get to this point and are equally invested in it, both emotionally and financially.
Whatever type of working relationship they have, people and situations change. Unfortunately, it is not uncommon for the relationship between joint business owners to deteriorate. Sometimes, it is to the extent that it’s not possible for them to work together any more. If disagreements between shareholders are not resolved quickly, it can take a serious toll on the business.
So what happens if things do go wrong? How can business owners ensure both parties are protected?
Does having a shareholders’ agreement solve a dispute?
For most small companies with multiple shareholders, a shareholders’ agreement is a good idea.
Having a shareholder’s rights clearly and legally documented early on is often the best way to avoid a deadlock situation arising from disagreements or disputes between shareholders.
Each party’s rights will be outlined in this agreement. It acts as a private contract between shareholders dealing with short and long-term business management.
For a 50/50 company, many shareholders’ agreements do not mention deadlock. They rely on the natural incentive for the parties to agree a resolution between them to avoid the business suffering. However, this only works so far, and when the relationship is on its last legs, emotions can take over and that natural incentive may not be there.
There are various mechanisms that could be included in a shareholders’ agreement to potentially help in a deadlock. These include the introduction of a third person, either on the board or with a minority stake in shares, referral of a dispute to an independent expert, or a put and call option over the shares. It is important to consider what is appropriate for that business and for all disputes, and to understand the implications of including it.
What happens if there is no shareholders’ agreement?
In the event of there not being a shareholders’ agreement, or any other provisions in the company’s articles which are relevant in a deadlock, there are various routes to consider. It is important to seek legal advice early on from an experienced commercial law solicitor. They can advise you on which options might work best for your particular situation.
Some of the options to consider are:
- Instructing a third party to help break the deadlock, such as a mediator.
- Agree and negotiate an exit. One party sells their shares to the other or the company buys back shares from the exiting party. This is the most common resolution and certainly the most cost effective and timely outcome.
- Closing the company down, as long as both parties agree and the company is solvent.
- Court action. It is possible to apply for an unfair prejudice petition or a just and equitable winding up petition to deal with shareholder disputes. It may be worth exploring if these are relevant, particularly where one party has been acting improperly.
How can we help
As with many aspects of running a business, having a legal expert to hand can make all the difference when it comes to making and managing tough decisions. By consulting an expert commercial lawyer early on, most situations can ultimately be negotiated and agreed between the parties.
To discuss how you can best protect shareholders in a 50/50 company, or for guidance on how to resolve a shareholder dispute or exit where the relationship has irretrievably broken down, contact us on 0117 325 2929 or fill out our online enquiry form.