27 Mar Case study – Losing Equity
Business idea formed in the pub? Formalise your agreements or risk losing all your equity!
Forgetting, or neglecting, to formalise a shareholders’ agreement can lead to costly situations that see you losing equity you have put up into your new business.
The following is fictitious case study but based on numerous actual real life cases.
The scenario
Keith is in the construction industry.
Suddenly a new market opportunity arises and he strikes a deal with two other mates at the pub to get into it and start trading.
They set up the company.
Some documents fly back and forth between shareholders submitted by one of their lawyers but eventually nothing gets signed as business is so busy and they are just able to keep up with everything and meet their expenses so they don’t go out of business.
Although Keith loaned the company $100K, the loan documentation was submitted to the other directors for signature, but guess what…….they fobbed it off for long enough and Keith eventually gave up harassing them.
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Keith finds himself at the coalface running the day-to-day management of the company and the others start to slide.
One of them who said he had funds to put into the company in exchange for Keith’s “sweat equity” now decides that he doesn’t want to continue.
The other shareholder often behaves unprofessionally. It’s all falling apart and something’s about to give. Keith knows that he is personally liable for PAYG payments and other tax, as he is a director of the company but at the moment, he can’t even trust the others.. Without a signed Shareholders’ Agreement, he knows that he is only one voice and the others will have the majority.
The unsigned shareholders’ agreement means nothing and the breakup is going to be messy. Supreme Court proceedings are looming large and the company will either have a liquidator appointed or will appoint a receiver if it determines it can’t pay its debts as and when it falls due.
Keith knows at best, he’s going to walk away with nothing.
All that effort… gone.
Contact us today if you require any assistance with preparing or reviewing your Shareholders’ Agreement.
(c) Progressive Legal Pty Ltd – All legal rights reserved (2019)
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Ian Aldridge is the Founder and Principal Lawyer Director at Progressive Legal. He has over 15 years experience in advising businesses in Australia and the UK. After practising in commercial litigation for 12 years in major Australian and International Law Firms, he decided to set up a NewLaw law firm in Australia and assist growing Australian businesses. Since then, he has advised over 2,500 small businesses over the past 6 years alone in relation to Intellectual Property Law, Commercial, Dispute Resolution, Workplace and Privacy Law. He has strived to build a law firm that takes a different approach to providing legal services. A truly client-focused law firm, Ian has built Progressive Legal that strives to deliver on predictable costs, excellent communication and care for his clients. As a legal pioneer, Ian has truly changed the way legal services are being provided in Australia, by building Legal Shield™, a legal subscription to obtain tailored legal documents and advice in a front-loaded retainer package, a world-first. He has a double degree in Law (Hons) and Economics (with a marketing major). He was admitted to the Supreme Court of NSW in 2005.
