Corporate governance, for many business owners, is like fire insurance: it is a seemingly unnecessary hassle to set up and maintaining it seems like a needless expense; but when things go wrong, you sure are glad you have it
Corporate governance, at its most basic level, is how a company operates: who makes what decisions, and usually more importantly, who controls who gets to make those decisions. Depending on the type of business organization selected, the identity of "decision makers” can be found in partnership agreements, articles of incorporation, bylaws, operating agreements, and/or shareholder agreements.
Individuals starting a new business often overlook, or intentionally put off, formalizing their business structure with proper corporate governance documents. Common reasons cited for not doing so are the belief that it is not necessary, or that it suggests distrust between business partners.
Many business owners have utilized form preparers as a sort of stop-gap. Often times, these standard form documents are advertised in a “one size fits all” model, but the reality is that most companies are not the same because the owners and management have varied expectations of their roles and responsibilities.
The narrative is all too often played out in Court: one partner disagrees with another partner or partners about a critical business decision and the question becomes, who gets to decide? Whether it is to sell, expand, or shrink the business; or hire and fire employees; or merge with or add additional partners; major business decisions can result in disharmony. Typically, the corporate governance documents would be referenced in order to determine what, if anything, can be done.
It is usually at that point that they realize that the corporate governance documents are lacking or do not accurately reflect the understanding between them.
One common situation is when one business partner passes away, what happens to his or her partnership interest? Is it going to be sold to the other partners? For how much? Can the deceased partners’ heirs stand in his or her place and maintain that interest?
These are issues that would have been dealt with in a buy-sell agreement, the creation of which would cost a fraction of what it will ultimately cost to have to litigate issues presented without a buy-sell agreement in place.
Where there are no agreements, unless the parties can arrive at some resolution of the dispute, the parties’ rights may ultimately be decided in court. Depending on the complexity of the dispute, countless hours and resources may be expended trying to reconstruct the intent and/or agreement of the parties. Such expenses could have been avoided had the parties taken the time early on to formalize their relationship.
Although it may seem strange to think about the handling of problems at the outset of forming a business, it is actually the ideal time to put provisions in place dealing with matters like: ownership percentages, capital contributions, profit distributions, breaking deadlocks, management and control, time commitments, restrictions on competition, restrictions on transfer, and buy-sell agreements.
Ultimately, business partners that do not take the time to formalize their relationship in corporate governance documents early on, while they are getting along, wind up spending significantly more time addressing those issues later on in the context of a lawsuit.
Martin Dack of the Dack Law Group maintains experience drafting, preparing, reviewing, and amending corporate governance documents for partnerships, closely held corporations and LLCs. What is more, should litigation arise, Martin Dack retains the ability to represent business partners, shareholders, and members through verdict, judgment and/or settlement.□
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