Corporate Agreements

If I told you I was starting a new business and looking for investors, would you give me $50,000 without any paperwork?  If you and I were going into business together and each investing $50,000, would you rely simply on a handshake as evidence of our agreement?  You probably answered "no" to these questions, but you would be surprised at the number of people who have done just that.

Most people, when setting up a new business relationship, do not properly plan for when that business relationship will end.  Let's be practical: the odds of you maintaining your business relationship with your partner or partners until you retire are not good.  That is why it is essential for you to have a written agreement in place.

It doesn't matter what kind of business relationship we're talking about.  It may be a partnership, joint venture, investor or shareholder relationship.  The most important element of that relationship is the written agreement which sets out the terms of the relationship and the rights and obligations of the parties.

We see clients who have invested tremendous amounts of money (often more than $100,000) with very little or no paperwork at all.  Often, they are told that they are becoming shareholders in the business, yet they have not even seen any evidence that there is an incorporated company.

A proper investment will involve a multitude of documents created by your solicitor.  Ideally, you will become a shareholder, director and officer of the new company.  You will receive copies of documentation setting out your position in the company and the rules by which the company does business.  There will be a shareholders' agreement which would prevent you from losing some element of control over the business.  There may be security in place so that your investment is protected.  There will certainly be a termination clause which sets how agreement is terminated and how you are to receive the return of your investment.

All these documents cost a lot of money to prepare and negotiate.  However, if you are making a significant investment, it is only common sense to take precautions to protect that investment. Documentation is even more important when you are a "silent" investor.

Look at this way: you are being asked to invest most likely because the bank will not lend the money.  The banker will not lend the money because they believe it is too much of a credit risk. If you do not believe in high-risk investment, ask yourself why you're getting involved.  If you do ultimately get involved, take the necessary precautions to reduce the risk.