Do Your Homework on Business Organizational Documents

Do Your Homework on Business Organizational Documents

March 21, 2016

Time spent periodically reviewing your business organizational documents such as articles of incorporation and other related documents can be time well spent!

Drafting your own corporate documents can be a penny wise and pound foolish decision.

Recently a client encountered difficulties when she drafted her own shareholders’ agreement without benefit of seasoned legal counsel. The buy-sell provisions in the document were at best ambiguous.

Notably, while the agreement gave the corporation the right to repurchase the employee’s shares if his employment was terminated, the terms of the repurchase were not clearly spelled out in the agreement.  In particular, the client neglected to define how much the corporation would pay for the employee’s shares, as well as when and how payment would be made to the employee.

The client then compounded this error by issuing shares to employee without obtaining his signature on this poorly drafted shareholders’ agreement.  Needless to say, the employee was not inclined to sign the shareholders’ agreement once he already had the shares in hand.

Hiring a business lawyer to fix the consequences of drafting mistake can be far more expensive than hiring the lawyer to draft the document in the first place.

To make a long story short, the client wound up having to hire us to negotiate the purchase the employee’s shares when he resigned and spent a considerable amount of time and money in the process.

All this time and expense could have been easily avoided had the shareholders’ agreement been drafted properly and executed before any shares were delivered.

I recommending to all business owners that they have their internal housekeeping paperwork reviewed now, in advance of any problems/issues.

My client could have avoided substantial stress and time and expense had she handled things differently.

This is another example of where an ounce of prevention is worth a pound of cure.

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