When you started your company all those years ago, you were certain you didn’t need a Shareholders’ Agreement (or, in the case of an LLC, an Operating Agreement). An attorney would have charged you more than you wanted to pay at the time to draft one (as they usually do), and after all, you trusted your business partner (back then). If an issue between you ever arose, you were confident in your ability to work it out quickly and easily.
But now, you and your business partner have encountered a dispute that cannot be resolved – a fundamental difference of opinion over the direction of the company. He blames you, and he wants out. A carefully-drafted Shareholders’/Operating Agreement might have contained a buy-sell agreement that spelled out each shareholder’s right to be bought out by the other under certain circumstances. Without such an agreement, though, your partner feels trapped, as if he has no choice but to sue.
So he sues, alleging shareholder oppression and mismanagement, accusing you of failing to undertake numerous actions that were never your responsibility. Had an agreement been in place, you might have been able to point to language showing that the responsibilities you are alleged to have breached never were charged to you. Once again, a written agreement, spelling out the rights and responsibilities of all the owners, would have proven quite useful.
I have seen this situation, where the absence of an agreement between the parties has led directly to shareholder dispute litigation.
Then, to add insult to injury, after your attorney has charged tens of thousands of dollars to defend you against the shareholder oppression claim, your business partner finds a buyer and announces that he intends to sell his 50% interest to him, completing his exit strategy. Without an agreement to protect you, you are now in business with someone you’ve never met, and this stranger owns the other half of your own company. But you saved money by not having to pay for an agreement at the outset. Congratulations.
All of this can be avoided by making sure that you consult with an attorney who is conversant in shareholder dispute issues – not only when you get sued, or when you are ready to sue your business partner – but also when things are going well. As with so many things, a little legal “preventive medicine” can save a fortune down the road.