Zombie shareholders

Zombie shareholders – dawn of the dead

Why do shareholders and directors walk zombie-like into agreements without protecting themselves from the risks of litigation?

In George A. Romero’s cult classic zombie apocalypse, hordes of the living dead wander the streets and shopping malls in an unthinking catatonic state, seemingly unable to prevent a slow, plodding, violent end. In much the same way, shareholders and directors often wander zombie like into agreements and arrangements which leave them hopelessly exposed and vulnerable to attack. Otherwise sensible and savvy businessmen are happy to unthinkingly wave through agreements and structures for fear of upsetting their new business partners, blindly following the path of least resistance on the basis that “we are all essentially good guys, and we’ll always be on good terms and agree stuff, and if we don’t we’ll work it out”.

Yet internal disputes within any business can arise at any time for a wide range of reasons, including:

  • disagreements over strategy, direction and development;
  • responsibility for poor financial performance, missed targets or a failure to pay expected remuneration or dividends; and
  • deteriorating personal relationships caused perhaps by conflicts of interest or lack of communication within the business.

Often the only viable solution is for one or more parties to leave. However, this process can be just as painful, both financially and emotionally, as walking out on a marriage or any other long term relationship, where the potential for disagreement and recriminations are all too evident. Directors, partners and members may face expensive legal proceedings against them individually and an otherwise flourishing and viable business may face dissolution or forced winding up.

As The Walking Dead’s sheriff deputy Rick Grimes warns those left in Alexandria about the dangers lurking beyond the walls, “we have to come for them before they come for us”.

For companies, partnerships and LLPs, it is vital that they minimise the risk and impact of any dispute on the underlying business and prevent it from fracturing the business apart.

For directors, shareholders, partners and members, it is vital that they receive clear and well thought out advice as to their legal position and the steps they can take to protect their investments and livelihoods.

For those of you anxious to be one of the survivors, think about following five simple steps:

  • Prevention is better than cure – the impact of any fall out can be minimised by properly drafted and well thought out shareholder, partnership and member agreements, employment contracts and effective corporate governance structures and procedures. This should include a proper mechanism for exit for each individual and a fair and transparent method for valuing any individual’s interests which also allows the business and those individuals remaining within it the time they need to complete the process without causing it unnecessary financial pain or disruption;
  • Taking early legal advice – It is vital that you (whether as an owner, director, shareholder, member or partner) understand your legal rights and the structures and obligations that are presently in place, and how exposed you or your company may be if something goes wrong;
  • The need to talk – If a dispute arises, it is important that an informed dialogue starts between those concerned as early as possible so that the parties can begin to identify and understand the underlying issues and begin to explore the full range of possible remedies and outcomes;
  • Use Court proceedings to take control – Where resolution or agreement cannot be reached, then Court proceedings can be initiated by individual shareholders, members or partners to seek the courts assistance in resolving the dispute. Often striking first and early can help you define the landscape of the dispute and seize the initiative;
  • Achieving a clean break – This often involves agreeing a fair market price for the leaving individual’s interests in the business, allowing all parties to move on.

It is vital that directors and shareholders understand the need for practical and commercially sensitive advice, so that they are able to manage and resolve these disputes quickly and with the minimum disruption to the day to day running of the business or your other commercial interests. From the outset it is important that they obtain advice and assistance in setting up agreements and structures which help prevent such damaging disputes from occurring, including the provision of agreements which help regulate and control any dispute and exit, providing a clear and practical method for fairly valuing your business and your interests in it.