Charles Vethan: Hi, I’m Charles Vethan. Welcome to the Vethan Law Firm P.C.’s Video Educational Series. Today’s topic is the importance of shareholder and partnership agreements. Joseph, every growing business whether it’s a corporation and LLC, a joint venture or limited partnership, if they are growing, they need a thought out structured and negotiated company agreement. Can you give us some reasons as to why someone would want that?
Joseph Colvin: Frankly it’s because, when you start a business, you know who you are dealing with. There are certain events in life that can arise and suddenly you may have someone unexpected sitting at the business table with you. There’s five common situations, where this can arise. Obviously, if your partner dies, if one of you, or yourself or your partner get’s a divorce, if perhaps a shareholder wants to sell to a third party that’s referred to as a disposition. The other situation as we mentioned in the previous video segment was fiduciary duty issues that arise and finally what happens when an active shareholder or partner in a business becomes disabled. You have to be able answer these questions before those questions arise.
Charles: In the situation of a divorce Joseph, many states like Texas are community property states. If the business owner, starts his or her business after they are married, then the spouse has an equal ownership right in the company. One of the things a partner wants to make sure is that if one of the business partners has a divorce, then some type of agreement addresses that issue. What will happen to make sure that the interest of the divorcing partner is not awarded at least up to 50% to his or her spouse? And all of a sudden, you have the spouse now sitting at the management table making decisions. Not only it is awkward but also it could be detrimental to the business.
Joseph: Same scenario is what happens when your partner dies? I know about this insurance commercial about his 26-year old ne’er-do-well son now owning half the company. There are ways to avoid that apocalyptic situation. In addition, we mentioned earlier, disability, what happens when an active partner has to become a passive partner? Your business has to be able to address that issue in order to survive.
Charles: This is an issue that is fairly litigated. If you choose to have disability probation in your agreement, this issue now becomes who defines who defines what the disability is? Does the physical disability prevents someone from operating functionally in a business or someone has to adjudicate the disability is that a court or is that determined by an insurance policy and is there something set aside to take care of their business parent who becomes disabled.
Joseph: The final disposition is how do you deal with a partner wanting to sell? Maybe they want to move on. What controls how and when and if they can bring ina third party to sit down at the table with you.
Charles: That’s an issue that’s also litigated quite a bit is because the shareholders or business partners have to decide an evaluation method. Here’s the problem, a lot of these companies are privately held companies, which means you have one or two people who’ve developed the company and are probably driving the business. If those are the individuals who are leaving due to one of the situations that we’ve discussed, is it fair to have that company valued the same way that a public company would be, which is much bigger in scope? These are some of the issues that we deal with in our corporate law division.
Joseph: All of these can be dealt with in a simple, concise, corporate, shareholder or membership agreement. We address all of these issues on our day to day practice. You can find more information about this in our other topics at www.vethanlaw.com.