The late Peter Carter-Ruck, specialist in libel law, was frequently heard to say that he ran his office off the clients who took his advice and his Rolls-Royce off the clients who did not.
Although it is of course possible to start and successfully operate a business venture without the benefit of any legal advice or documentation, it rarely happens (in our experience). The high probability of disagreement between business owners and stakeholders is such that you either pay for legal advice and documentation on the way into a venture or you pay far, far more for it on the way out !
Clients frequently come to us with disputes which have arisen from badly drafted, ambiguous, one-sided, incorrectly executed or non-existent documents. There are many reasons for which companies and individuals embark on business ventures without first obtaining legal advice and proper legal documentation:
- they don’t want to incur the cost of legal advice / drafting
- they don’t want any delay caused by legal negotiations / drafting
- they don’t want to damage good will by negotiating about what will happen in the event of default or material breach of the business arrangement
- they don’t want to imply that there’s a lack of trust at the outset
- they don’t want to expose or highlight any unequal bargaining positions
- they may simply feel that they don’t need a lawyer because they haven’t got a legal problem…yet
Without negotiated documentation, the scope for disagreement is far, far greater.
If the venture is successful, the parties may disagree about who owns it and in what proportions. If the venture is unsuccessful, the parties may disagree about who is at fault, or liable to contribute further capital or pay debts. Either way, where there’s uncertainty, there will be disagreement.
The cost of preparing appropriate legal documents is likely to be far, far less than the cost of later disputing what should have been included in those documents. Most business ventures are not entirely novel and the lower cost of adapting existing legal documents can be combined with the advantage of previous experience in that field.
The function of company constitutional documents and commercial agreements is not only to provide for the expected or probable outcomes, but also to provide for outcomes which may appear less likely at the time of negotiating and drafting and to provide for changing circumstances, thereby significantly reducing the scope for disagreement. If a given set of circumstances is provided for in the documentation, logically there should be no dispute as to the resulting obligations and liabilities of the parties. Legal documents can also provide for what is to happen in the event of a dispute, for example how the company is to be valued and which party will be entitled to buy out the other, thereby avoiding litigation.
It may be true to say that the majority of legal documents are never challenged or litigated, but that is a testament to their success and not a reason to avoid them. A well-drafted shareholders agreement is essentially a road map for business owners to follow to protect and enforce their respective rights and interests in the value of a business and provides a path to avoid or resolve disputes.
As we see regularly, it’s always better to pay on the way in than to pay far, far more on the way out !
This Room 228 Newsletter is not intended to be and should not be relied on as legal advice. You should seek professional legal advice before taking any action in relation to the subject-matter of this Newsletter.