Are we about to be shafted by a Corporate Shark?


16

My husband went into business with a gentleman who seemed to be very clued up (he's an accountant). He has numerous other businesses and was able to open doors that we would never have had access to in order to start up our business.

On his suggestion my husband became Company Director while he took the role of Company Secretary. The business needed a capital injection in order to get it up and running which he estimated/forecast at £45k. He is well connected and managed to secure a loan for this amount.

For seven weeks my husband was alone in overseeing the refurbishment (it was a pub opening) and opening of the bar, something he had never done before. He worked for 7 weeks on this, doing 14-17 hour days, 7 days a week and never took a penny for the work. He kept the 'partner' up-to-date on spend every day. Some of the purchases (£13k) were paid for direct from our savings which we fully expected to be matched by the partner in order to have cashflow now open. We went slightly over the spend budget but not on anything that was not needed (builders extra costs due to bad weather etc).

After asking the partner how he wanted to proceed with regards to his input into the company and fears over cashflow he has replied that he is not liable to pay anything in (he paid the builder £10k but took the money straight back from the loan company into his own account without it hitting the company account). He said, if there is a cash flow problem, that is our problem not his, that he would expect us to input a further £25k at least to keep it afloat.

He outlined his brief that he has done his part of the job (premises location, bank set-up, finding company to loan money etc) and for this he expected no input from him PLUS 50% share into the company. This would mean that we would be placing over £35,000 of our own money into the company with no debt to him and that he would still retain 50% of any profit - this was never outlined to us until after the fact. This seems totally unfair.

We are new to this and probably too trusting, but we just need to know where we stand. We cannot afford to fund this whole business on our own and will probably have to walk away. My husband thinks that this was always his plan, as he is well placed with the company that loaned the money AND the person who sold the lease. My husband thinks that he is hoping we will walk after setting everything up, getting the place up and running and spending all our money. He can then just walk into it (he has the money) with no input at all and take it from there...

I hope someone can help us.. We are going to seek legal advice of course but this is our first step...

Equity Partnerships

asked Dec 31 '10 at 01:06
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Rodders
81 points
  • What happened afterwards? – Chris... S... 8 years ago

1 Answer


16

This is hard to write an answer to, really. On the face of it, going by what you describe, yes it would seem that you're in the hands of a predator.

Clearly, since you and your husband are talking about the business partner in these terms, there is a problem. If nothing else, then there is a loss of trust so severe that it threatens the business.

You must absolutely obtain good counseling. Hire a good lawyer who is specialized in corporate affairs, and perhaps see the local entrepreneurship community if there is one.

What mainly triggers my attention is the disconnect between the deal terms as you initially understood them, and as he outlines them later on. Now getting 50% just for securing a loan, finding a lease etc, that seems way way too high. But in itself, if you guys knew you were signing up for this, and were okay with it at the time, then it could be accepted.

But your description seems to say that it "sprung as a trap", that you suddenly became aware of having signed away lots of things you didn't know you had. That is of course not ethically justifiable.

My initial suggestions to you are:

  1. Start securing "evidence". Find all written agreements, emails, emails from private accounts, papers, anything that can be admissible in courts.
  2. Read through all this material. Create an index of what information is where. Take the most important things with you to a lawyer. Be sure to include both what is good and bad for you. You must provide your lawyer with an un-biased selection of materials to work from. If you don't, he may give you bad advice.
  3. Think about support network. Do you know any smart people with experience in similar matters who can help you with advice in this situation? Ideally they're not nearest family (too emotionally involved, will always side with you). It's better if they're not too close to you personally. Get them involved now, discretely.
He outlined his brief [...] for this he expected no input from him PLUS 50% share into the company.

(My emphasis on "expected"). Is it possible that you have not signed away ownership to him? Could it even be one giant misunderstanding, where he is asking for a high ownership percentage, but is expecting to be negotiated down to something more reasonable before the final agreement?

but we just need to know where we stand.

Sorry, but we can't tell you. In your explanation above, you're not giving any specifics about the contracts you have signed. Any answers we write here are best-effort guesses, based on the few facts you have provided. So we're back to assembling the materials that document your deals (contracts etc), and go see a qualified lawyer.

I'm not presenting any clear-cut solutions. Since you don't even know who has signed for what (i.e. who is liable for the rent, the contractor's invoices etc) that would be premature.

answered Dec 31 '10 at 03:36
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Jesper Mortensen
15,292 points
  • I'm not sure how non-US companies work, but in US companies, the secretary is in charge of all the company's corporate minutes and legal documents. If that's true where you are, you need to get access to the minutes, in particular, and make copies (preferably notarized) to make sure he doesn't insert something fraudulent later. If he won't give you access to the minutes, you will know something's very wrong and you need to immediately talk to an attorney. – Bob Murphy 9 years ago
  • It also sounds like you and the accountant had a lot of verbal agreements that weren't written down and your positions now differ on. If that's true, he's in as bad a spot as you. For instance, unless you and he agreed in writing that he gets 50% of the business for what he's done, there's no reason for him to get that. – Bob Murphy 9 years ago
  • Have you issued stock yet? Do you have shares? Does he? If you have shares and he doesn't, you could theoretically hold a special stockholders' meeting and vote him out as secretary. Of course, if he has shares and you don't, he could do the same to remove your husband as director. And if his role as secretary is what it normally is in the US, he's the person who issues shares. If he has it in for you, you're really in a pickle. – Bob Murphy 9 years ago
  • It sounds like you've put a lot of money and work into building out the pub premises, and you think this accountant wants you to fail so he can take over the lease and gain the benefit of all that. If that's correct, you should check into what your lease and local laws say about what you can remove or demolish from among the premises improvements. That way, if the pub fails, perhaps you can sell what you can to recoup some of your losses, and on other things not let him have the benefit. – Bob Murphy 9 years ago
  • @Bob Murphy: Great comments. You could put them into a separate answer; they kind of deserve that. :-) – Jesper Mortensen 9 years ago
  • Bob, thank you so much for this advice, it, like the other comments, are really helpful and actually has helped me get my head around what I need to do. As its Christmas/New Year there are no solicitors around until 5th July so I have been quietly panicking! Both my husband and Partner own 50 shares each in the company. I have found two emails where he outlined only that he expected a mnthly fee of £250 + 50% which we agreed. We are meeting on Thursday to try and find out what his end game is and will also by that time have a solicitor. Good call on the ownership of goods bought! – Rodders 9 years ago
  • @Jesper Mortensen: Well, actually, you really hit all the key points. My remarks are just flourishes on top of your very sound suggestions. – Bob Murphy 9 years ago
  • @Rodders: The ideal situation is to set things up so that, if he screws you, it will cause him more pain than it will you. (One of my favorite sayings is, "Whoever can walk away from the deal first wins.") If you're mistaken and he's really acting decently, he'll be fine since he won't trigger any problems. And if he does start to shaft you, you can just show him what a world of hurt he'll have. People will sometimes throw a tantrum at that point but eventually they come around. – Bob Murphy 9 years ago
  • @Rodders: For instance, I've been doing some programming through a job shop that was very reluctant to agree to my standard payment terms, and the way they finally did it, I suspected they'd find excuses to stall on payment. So I just made sure their client was really happy with me, and then when they started stalling on payment, I said, "Ok, I'll just call your client and tell them I'm stopping work." This was their first contract with that client, and it would have ruined them for further contracts. So while there was much upset, the result was I got paid via wire transfer two days later. – Bob Murphy 9 years ago
  • @Rodders: (Darn short comments :-) I'm not sure what you could do that would be equivalent. But if this accountant wants to take over your premises with all your modifications, and if it's legal to do so, I'm sure a credible threat of removing all the taps and refrigerators and so on, and taking a sledge hammer to everything else, would give him a bit of pause. You should certainly check that with your solicitor before discussing anything like that with the accountant, of course. – Bob Murphy 9 years ago
  • @Rodders: On another note, I would say that a monthly fee of £250 plus 50% of the ownership and profits is ridiculously high compensation for some advice and introductions. It really sounds like you were naive going into this, but it also sounds like you've learned a lot at the School of Hard Knocks. So if you don't wind up opening this pub, you'll know a lot for the next one. :-) – Bob Murphy 9 years ago

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Equity Partnerships