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News 24.6.15

What happens when partnerships fail

News 24.06.2015

This article was first published in Private Client Adviser.

At the heart of every business there are relationships that depend on trust. Your clients must trust you to deliver on time. Your suppliers and staff must trust you to treat them with respect and pay them in reasonable time. Perhaps the most important relationship is that between the business owners or, in a bigger business, the board. When those relationships break down and there is no trust, the business suffers too. This article deals with relationship breakdowns ruining partnerships. But the same is true for disputes with third parties. I have seen many businesses fail because of a long running dispute with a supplier or client that becomes all-consuming for the owner. There are many, and often simple ways, of avoiding impasses. But remember that for any dispute to settle there must first be a recognition and willingness to compromise. Furthermore, an element of collective responsibility needs to be accepted by the partners/directors. Below are some common issues I have often seen that lead to business relationships becoming strained, and there are some simple steps to take to avoid or overcome these issues. Typical wars A good example that springs to mind, where a relationship can ruin a business, is with spouses. This would be where a husband and wife embark on a business together, then fall out of love. As their relationship gets increasingly distant and often confrontational, the business moves toward the bottom on a list of priorities: below the kids, the house and just above the dog or record collection. This occurs in the middle of what can be difficult and acrimonious proceedings. Surprisingly, I have found that on many occasions these are the easiest to settle. Although I have seen instances where the business continues and both parties carry on working together, more often than not one party will ultimately buy the other out. It may be that there are so many areas in dispute neither party has the energy or capacity to argue about the business which becomes just yet another issue. When two parties are at a complete impasse this will destroy the business. Such disputes tend to drag on the longest as both parties are incapable of settling. More often than not this will be two equal partners or shareholders, but it could just be two factions of a board, or two sides of a family. These disputes are by and large fuelled by a sense of inequality, either real or perceived. Whether this inequality is due to succession planning, unequal risk or profit shares, one side perceives that they are “working harder” than the other. The all-consuming dispute Unfortunately, such feelings are deep rooted. So without an arbiter they are more often than not incapable of settlement, financial or otherwise. Even in sophisticated large businesses, disputes can tear things apart. Such disputes tend to rumble on and develop to the point where indecision reigns and the business stagnates. Furthermore, both parties become completely focused on the dispute itself and are unable to redirect their energies elsewhere. This can have not only a damaging effect on the business but also on the individuals themselves. I became involved in many such situations where I have been acted as a Court Appointed Receiver. It has not been uncommon for the respective parties to agree at the end of the process that the Court Appointed Receiver is wrong, especially where neither party has been able to agree on the time of day for many months before my appointment. It is inevitable in reaching a compromise that both parties need to give a little more than they would like – ‘winning’ should be seen as reaching a conclusion so you can move on, not about “beating” the other nor prolonging further your war of attrition. Solutions As far as avoiding the disputes, and thereby the pain, there are many methods. First and foremost is “mending the roof when the sun is shining”. Have clear arrangements on how future disputes will be settled in the deed when starting your partnership (and in the shareholders agreement for a limited company). Partnerships are often compared with marriages and a deed is the partnership equivalent of a pre-nup. Yet it is even more important within a partnership as there are other ramifications on the partnership if a deed does not exist as the partnership will be deemed to be governed by the Partnership Act 1890 (not the most current piece of legislation). For instance, if you have no deed then if one of the partners resigns or dies then the partnership is deemed to be dissolved. As a guide the deed or agreement should cover at the very least the following issues: 1. Constitution – Who are the parties/partners? And whether or not there is room for more to enter the partnership and how they are elected/invited to join. 2. Remuneration / Profit share – How will this be handled? 3. Locus/ Authority – Which decisions requires the majority or absolute consent? This could drill down into authority to commit funds (Spending Power). In larger organisations, where power may be devolved down to a board or committee, the operation, constitution and powers of the committee will be dealt with. It is imperative that there is a method about how deadlocks are broken. In larger organisations this could be by giving a casting vote to a particular individual, or by providing for certain criteria to be passed before the resolution can be accepted, or a hybrid of both. Deeds and agreements have evolved over time and can now be very complex documents. It is my view that wherever possible you should strive to keep the deed as simple as possible. I have seen many instances recently where boards have been hamstrung by a badly drafted shareholder agreement. There is nothing more frustrating than having to take a solicitor’s advice on the clauses in a deed before making a decision. The major difficulty arises when it is a clear 50/50 partnership. Obviously when two people enter into business the intention is often to act jointly and severally and have an equal share of the profits. Consequently, it is difficult to draft as document that deals successfully with the issues arise when both parties are at loggerheads. And I do not believe that there is an easy answer. Unless there is some clear demarcation about responsibilities, which would be difficult to implement, then ultimately the matter will need to be settled either by arbitration or by the appointment of an independent expert to make a determination. Whilst this may appear unnecessary and possibly a little officious and cumbersome, I can assure you that from my experience many months of anguish and many thousands of pounds of legal fees will be saved if there is a clear and indisputable path to resolve disputes. Whilst the business may not always survive, value is inevitably preserved. Too many times partners have started arguing about the value in their business and how this is split, to turn around six months later and realise there is nothing left to argue about. Unfortunately when embarking into a partnership that is founded in a business and not mutual love and affection then one should keep an eye on what happens when there is a dispute. The all for one and one for all philosophy can quickly degenerate into every man for himself once the chips are down.

John Dickinson Partner d: +44 (0)20 7309 3832 click to email View profile on LinkedIn

Prior to joining CBW in 2011, John previously held positions at Bridge and Mercer & Hole, where he led the development of their rescue, recovery and insolvency departments in London.