The shareholders agreement is the corporate equivalent of the pre-nup.
Yet clients are always reluctant to enter into a shareholders agreement. After all, everyone’s great friends and they’ll just work it out, right? Especially when it’s a family business …
Unfortunately some of the most acrimonious disputes I have seen have involved family bust ups.
Our forensic accounting team acted as the independent expert in respect of an unfair prejudice claim brought by one of three equal shareholder siblings. Instead of valuing the business, the team were kept busy looking at various activities which had gone on over a period of some eight years.
Two companies were involved, both operating in the construction industry.
We investigated the amount of quasi-remuneration extracted from the business by two brothers through various benefits which had not been paid for and weekly drawings on their directors’ loan accounts. We analysed the detailed job costings prepared for each site to quantify the amount of expenditure incurred on properties owned outside the family business yet allocated to company projects.
Of course all these shenanigans had a negative impact on the value of the family companies, restricting their ability to invest in additional projects and to pay dividends to shareholders. We quantified this impact, working alongside a remuneration expert who opined on the reasonable level of remuneration that should have been paid to the brothers in comparison to the excessive sums which were actually paid.
The case settled on the day before the Defendants’ expert report was due to be served.
The client was pleased with the result but, due to the capital intensive nature of the business and the fact that many properties were retained as investments rather than sold on completion, was forced to accept settlement deferred over a two year period.
This case illustrates how business disagreements can affect family relationships, as in this case the Claimant only found out about the birth of a nephew on the day of his christening.