A recent client issue has provided a very practical reminder for why reviewing your stakeholder agreements (shareholder; partnership etc) is so important. A simple failure to review the appropriateness of their agreement has landed them in court and bearing the weight of the subsequent legal and emotional costs.
The client operated a large cattle station, the assets of which were subject to a partnership with another family member.
The partners had gone to great expense and effort in 2013 of preparing a partnership agreement (Agreement) that reflected their understanding of the operations and succession of the partnership interests.
Sadly, the family member passed away last year.
Our client sought to invoke the clause of the Agreement allowing them the option to purchase the deceased’s interest in the partnership.
A notice was provided and an attempt to furnish an offer for the interest was provided by our client in accordance with the valuation of the clause of the Agreement.
This was rejected and the relationship between our client and the estate of the deceased soured. According to the Agreement, an independent body was to then determine the valuation.
what went wrong?
Unfortunately, the independent body had in 2015, ceased to offer a valuation service. Specifically, the body no longer appointed a member to perform the valuation and given the private nature of the body, they were not required to act.
This effectively meant that there was no default process of valuation available to the parties.
The nature of the relationship continued to be frustrated and not being able to agree on a price or a process for valuation (notwithstanding the Agreement specifically detailing a process), the parties resorted to court intervention.
what are the takeouts?
There are two key takeouts from this scenario.
First, any agreement you prepare should have a ‘default to your default’ valuation or dispute resolution process to avoid relying on third parties that are not required to perform a task under the agreement.
Most importantly, your business succession arrangements are like other succession planning document; they should be reviewed regularly to ensure compliance with current law and your objectives.
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