6. Decisions and deadlocks
How to make decisions and how to resolve deadlocks if the parties do not agree.
7. Termination
What happens if one party wants to exit the JV – to whom can they sell the shares? Can one party prevent the other from selling to an unsuitable partner? Most shareholders’ agreements give the existing shareholder a pre-emptive right to purchase the outgoing shareholders’ shares. But at what price? And how is market price to be determined? A multiple of earnings before interest and tax (EBIT) or a multiple of recurring revenue? Should it be based on market price at all, if you have spent all your time and effort building up the business?
8. Client “ownership”
Issues regarding client “ownership” are among the most difficult.
• Who will have the right to service the clients after termination with your referrer? What is the process for effecting this in practice? For example, if you continue to service your referrer’s clients, who will tell the clients? What if the referrer appoints another adviser and approaches the client? What if the client declines to go with you and wishes to stay with the referrer? Will this be permitted? Should it affect the amount of any money that one party pays the other on termination?
• Even if agreement is reached with the referring partner as to how the clients will be serviced post termination, if you do not “control” the referrer’s personal relationship with the client base, there may be no “stickiness” in that agreement. A good shareholders’ agreement will contain restraints and documented co-operation obligations from the referring partner to prevent them undermining the client ownership.
• You may wish to limit the referrer’s ability to compete against you for a period after termination. These types of restraints are difficult. If they are too onerous, they may not be enforceable. If they are too lenient, they may not protect your asset. They need to be carefully prepared and having regard to the law in this area. Because this is an area where the law is laid down by judges, it changes regularly. Conclusion
It is worthwhile protecting your referral relationship with a well-drafted shareholders’ agreement that is customised for your circumstances. However, many clients initially feel that they cannot justify the cost. Nevertheless, this small upfront outlay will pale in comparison to the potential legal fees, personal time and potential loss incurred if you do not have one in place.
One of our clients had a JV with an accountant where the planning business sat in the accountant’s premises and paid over-the-odds rental. The accountant did the bookkeeping for the planning business – at exorbitant accounting rates, far more than the cost of hiring a bookkeeper. This planner found himself building up a client base, only to be paying more to the accountants than he was taking home himself.
Another client’s separation from his referral partner was made so difficult that it affected his health for years afterwards, impacting his ability to look after his clients and operate the business for some years after the split.
In both these cases, neither client had any documentation in place to govern his rights and responsibilities – a form of corporate Russian Roulette!
As a wise man once said: “Bad advice is much more expensive than good advice.”
Claire Wivell Plater is the managing director and owner of Gold Seal Risk Management Services and Gold Seal Legal. Her consulting and legal firm works with financial services businesses to assist them to manage compliance, regulatory and legal issues. Claire sits on the Australian Securities and Investments Commission’s (ASIC’s) Business Advisory Committee for the Real Economy.
