Be wary of “going halves” in business

22/09/2020

It is no understatement to say that lockdown and COVID have had a dramatic effect on the business world. Whether it is the enforced wearing of face masks or dealing with new cleaning and sanitising regimes, life is different.One of the largest changes has been an acceleration of those “working from home” or adopting other types of agile working arrangements. Just witness the quiet city streets and reduced traffic volumes if you are in any doubt.

Business break ups  But as with many changes, not all are for the better. The speed and scope of the changes has prompted an increase in business break ups with previously strong working relationships suffering under the increased stress and pressure. Similar issues with marriages and increasing divorce rates have been well reported. Those in business less so.

Most at risk are those where ownership and control are evenly split. So called 50:50 companies may seem appealing. Indeed, what can be more assuring than going into business with a friend (it almost always is) on the basis of equality? To the unwary, splitting it all down the middle sounds so sensible that it almost does not warrant any initial advice. But the reality is uglier.

Majority decision making

With almost all company law based on a requirement for majority decision making, an equality of votes when parties disagree automatically means that nothing can be agreed. This can be catastrophic. Without clear decision making and agreement on day to day operations, let alone longer-term planning and strategy, parties often find their efforts absorbed by the argument rather than the business. Sadly, definitive legal options are few and far between.

Disagreements can flare for a variety of reasons. It could be that your friend’s circumstances have changed, and early retirement has become more favourable. It could be that your friend has passed on leaving you dealing with a descendant with very different ideas. However it arises, today’s arrangements have become far less harmonious that they were at the outset when equality sounded so attractive.

Be prepared 

Ideally, a 50:50 split is avoided. If it cannot be, then putting procedures in place before any disagreement occurs would pay handsome dividends if needed. Consider it like a pre-nup for business which sets out what would happen when the worst happens.

Our commercial department, in conjunction with our litigation department, are well placed to assist you if it were to all turn sour. But we would far rather guide you before any such dispute arises to enable a swift resolution if and when it does. It may mean that the outcome requires one party to leave the business, but crucially it can avoid an extended period of damaging stalemate which is what the law would otherwise prescribe.

More information

If you require any specific advice in this area, please contact our commercial team.

This article was written by Edward Garston, Partner in the Company Commercial team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of September 2020.

22/09/2020

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