Divorce in business: how to protect yourself from painful consequences?
Divorce, both in personal life and in business relationships, is a difficult and emotional process. And whether the separation is between famous people, or whether the loss is in the millions or just pennies, the fact of betrayal is equally painful for everyone. Egidijus Langys, partner at AVOCAD, answers whether it can be avoided and what legal safeguards exist.
According to a business law lawyer, the most effective way to prevent tensions with a business partner is to have a shareholders' agreement. This is an agreement between the shareholders of a company that has the force of law for the parties to the contract. It can also be concluded in companies with a large number of shareholders. It should be noted that, in order to avoid a legal impasse, it is acceptable and advisable that the shareholders' agreement be signed by all shareholders of the company.
"There are no specific restrictions on the content of this agreement, other than the mandatory provisions of the law governing corporate governance, which makes it a highly flexible legal instrument. The shareholders may set out various terms and conditions, both those governing the specifics of the company's management and those regulating the relations between the shareholders, which have the force of law for the parties to the contract," says Langys.
A key advantage of shareholders' agreements is the ability of the parties to create an agreement that reflects the individual wishes, interests and visions of the shareholders. However, it is understood that a shareholders' agreement is subject to the approval of all the parties to it, and therefore the procedure for its conclusion must achieve a proper alignment of interests and consensus between the parties.
This is a very important safeguard of interests, as the shareholders' interests are materially affected by the agreement. For example, the order in which the company's profits are distributed, with individually negotiated profit distribution terms, for example, if the company's turnover and profits for the financial year are greater than €X, then the shareholders of the company are allocated shares in the profits. Meanwhile, in the absence of a shareholders' agreement, disputes and disagreements between shareholders can often arise and, in the absence of a shareholders' agreement, the ability of shareholders to prove their rights or claims is hampered.
According to lawyer Egidijus Langis, the shareholders' agreement must address the financing of the company. Shareholders' agreements on the financing of the company are particularly relevant during the periods of the company's incorporation and business development, for example, shareholders may agree on additional cash contributions to be made to finance the company or on loan agreements to be concluded. Shareholders' agreements may also be used to make arrangements for actions relevant to attracting external investment, for example by dividing and allocating the duties to be performed by shareholders in order to attract investment.
The contract must also contain provisions on corporate governance. For example, extending the rights or powers of the company's board. In order to reduce the scope of the rights of the company's manager and thereby eliminate the possibility of arbitrary decisions that are not in the company's interests, the shareholders' agreement may set out a list of significant decisions of the business or of the company's manager that are subject to the approval of the board. A shareholders' agreement is also an effective means of avoiding a legal impasse where the shareholders of a company have the same decision-making power and pursue different ways of resolving the issue at hand. For example, two shareholders of an LLC each hold 50% of the shares of the LLC, one of the shareholders votes in favour of adopting decision A and the other shareholder votes in favour of adopting decision B. Therefore, the shareholders' agreement may preemptively provide for ways to resolve the legal impasse, for example by agreeing in a compromise way that shareholder X's vote is decisive for the appointment of the company's CEO and shareholder Y's vote is decisive for the appointment of the members of the board.
It is also worth including in the shareholders' agreement a regulation on the sale of shares in the company. It can be agreed whether, if one of the shareholders decides to sell his shares in the company, the other shareholder has the right of first refusal to acquire the shares to be sold, and the method of calculating the price of the shares to be sold can also be agreed. It should be noted that the waiver of the shareholders' pre-emptive rights may also be provided for by the shareholders of the company in the company's articles of association.
The contractual liability of the shareholders is also very important. The shareholders may agree on the application of contractual liability of the shareholders for certain defaults, but it is important that the form and amount of such liability must not be in breach of mandatory provisions of law, public policy or good morals. Moreover, it should be noted that, according to the recent case law of the Court of Appeal of Lithuania, it is the penalties provided for in the shareholders' agreement that are the essential and most effective means of ensuring compliance with the shareholders' agreement. However, a shareholder who discovers that another shareholder has breached the shareholders' agreement must act swiftly, as such fines are subject to a six-month shortened limitation period.
The agreement should also include a clause on dispute resolution procedures. A shareholders' agreement is not only relevant for the preventive nature of avoiding shareholder disputes, but it can also provide for effective dispute resolution procedures between the parties. For example, in the case of a particularly damaged relationship between shareholders, where there is no possibility of cooperation between the parties and the likelihood of a peaceful resolution of the dispute disappears, but where the actions and conduct of the shareholders do not constitute a legitimate basis for the application of the compulsory sale of shares provided for in the Civil Code, the procedures and conditions for the compulsory redemption or sale of the shares, as negotiated in the shareholders' agreement, can provide the circumstances for a proper and effective resolution of the shareholders' dispute. The shareholders' agreement may also agree on the jurisdiction to be established for shareholders' disputes.
A shareholders' agreement is drafted to regulate both the company's corporate governance and the relationship between shareholders, and a timely shareholders' agreement is a great preventive way to avoid legal disputes and painful divorces.