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152 
REAKING UP Is HARD TO DO
Page 46
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What happens if business partners fall out? Make sure you have structured your company to prepare for the possibility, or face the resulting costs.
At the start of most businesses those involved normally have a rosy out
look on the futuro but a few years later things may be very different. An example of what may go wrong is shown in the fictional case of Bob and Jim. Bob and Jim form a company, BoJim Transport. The company started trading in 1990 with Bob and Jim holding 50% of the shares each.
However, six months ago Bob and Jim's relationship started to show cracks. Jim at 43 was looking for a new challenge and considered expansion. Bob at 51 was looking to retire from an active role in the business but wanted to keep his shareholding. Bob and Jim hit deadlock. Neither wanted to sell their stake in BoJim but neither could they agree on how the business should be run or the future of the company. Their legal position is centred on three key areas: e Bob and Jim's position as shareholders; • Bob and Jim's position as employees; • Bob and Jim's position as directors. Jim wants to carry on with the business; Bob doesn't want any active involvement but does want to retain his shareholding. Given they both own 50% of the business this means that Sim will effectively be working for Bob for free.
As Bob has an equal shareholding in the business it is unlikely that Jim will be able to carry on running the business without his involvement. If Jim did, however, Bob might at some point bring a claim for "unfair prejudice". This would involve Bob bringing proceedings before a court on the basis that his interests as a shareholder were being prejudiced because of Jim's conduct.
Such litigation is complex, costly and time-consuming, and the court has wide discretion in relation to its judgement. But typically it will order one shareholder to buy out the shares of another.
If, however, there is simply a deadlock, with neither party being able to run the business without the other's assistance, Bob could apply to the court for a "just and equitable winding up". This is available where, although the business has been incorporated, it is in essence a partnership. In this case the court would be likely to order that any proceeds resulting from the winding up would be shared equally by Bob and Jim.
The costs of winding up a company can be substantial. The winding up will become public knowledge and this may affect the amount realised. Sim and Bob are therefore likely to realise significantly less than they would otherwise get in an orderly sale.
Often there are few potential buyers for a haulage business and a liquidator is bound to look at the company's own man
agement for potential purchasers. While in many respects Jim's position is equally prejudiced by a winding up, if he goes on to purchase assets from the business he may in fact be able to cherry-pick assets, probably at less than true market value.
As well as deadlock at shareholder level, there is also deadlock both from an employment and directorship perspective. Neither Bob nor Jim can have their employment terminated by the company lawfully unless it has a fair reason. On the above facts there is unlikely to be a fair reason, so any dismissal likely lobe unfair.
Neither Bob nor Jim can remove I other as director as a resolution of t company (involving both directors) mt be needed to do so.
Going wrong
When setting up companies, individw need to consider what happens wh things go wrong. A director will want know what his rights are both as employee and director and also as owner. In terms of owner managers, it also necessary for the managems team as a whole to consider what shot happen if one or more of them were underperform or do something worF. such as defraud the business.
A relatively simple set of contracti documentation can remove the unc tainty when things don't go to plan.
Each director should have employment contract which includ details of their salary and not period and restricts their ability compete with the company once th leave its employment.
Termination of a director's emplc meet by a company does not Mame cally terminate their appointment director. So it is also useful for employment contract to contain a clau authorising somebody to execute all nE essary director resignations on behalf the leaving employee.
The next stage in the protecti. process is looking at documenting she ownership and what happens when owner-manager leaves. The most col mon way of doing this is to establish shareholders' agreement and articles association which are tailored to t specific concerns of the managemE team. These outline whether or not a
how a leaving or underperforming dim tor will be required to sell his shares
the remaining directors and for wt value. They can also include restrictio on controlling shareholders selling c without taking minority shareholde with them and provide a mechanism f resolving disputes.
• by Pairick Ilawnsley Patrick Rawnsley is a corporate partr in the Leeds office of the national law fit Eversheds.