Legal Hypothetical: Joint venture tests the friendship

 

Joint venture tests the friendship

Gabby and Ted are best friends and after a number of discussions, decide to embark on a small business venture together. Gabby has saved enough to fund the initial capital to put into the business.

In return, Ted plans to work full-time in the business while Gabby will only work around 15 hours a week. Gabby and Ted decide that each will own 50 percent of the business.

Due to their close friendship, they feel that there is no need for a formal written agreement between them.
The business starts slowly but by year three it is running successfully and employs six people.

Gabby now wants to raise additional capital to set up another store.

Ted thinks it would be better to invest into online sales and streamlining logistics.

As each party owns 50 percent, there is a deadlock as to the direction of the business.

Neither party wants to sell their share in the business.

Gabby seeks legal advice to break the deadlock, and to ensure the business opens new stores. The lack of a business agreement such as a shareholder agreement is proving very problematic.

A well-drafted agreement can ensure deadlocks are avoided through a chair with a casting vote or distribution of voting rights.

Further, an agreement can provide a clear path to dispute resolution that can involve an independent person who is agreed by both parties.

Gabby and Ted eventually go to mediation, an arduous process considering neither want to give-in.

Unfortunately, the friendship between Gabby and Ted deteriorates and Ted eventually sells his share of the business.
Thank you to Anthony Fogarty for his assistance with this column.

If YOU would like a particular issue addressed, please email Manny at [email protected] or call him on (02) 6648 7487.

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