Disagreements in the Boardroom – A Buy-Sell Agreement Can Ease Changes in Business Ownership
Have you been in situations when you do not see eye to eye with your board members or partners? Are their opinions not in sync with yours most of the time?
Boardroom disagreements are inevitable. Over the years, there are probably more disagreements than you would like to remember. There is, of course, no lack of reasons for board members or partners to disagree. They could stem
from differences in management style or business direction. The result is tension between board members or partners that fester and undermine the overall health of the company.
These disputes can arise in good times or bad times. Sometimes, board members point fingers at one another when the business is lacklustre. Other times, differences in ideas to add more value to a business cause friction. Do you sometimes feel desperate for change?
Board members divided in views
Steven is the CEO of a company that manufactures and supplies high-impact commercial tempered glass. It supports the near-monopolised public transportation industry in Singapore and Malaysia. The factory is located near Woodlands Checkpoint, where it enjoys the geographical advantage of ease of access to Singapore and Malaysia.
Incorporated about three decades ago, the company has few or even no competitors. It has been reporting stellar profits fuelled by rapid developments of transportation infrastructure. On the whole, board members are pleased with the company’s performance.
As the appointed CEO for more than a decade, Steven has a good track record of
growing the company steadily. Even though the business did not set up to become a global company, Steven has great visions for it to penetrate international markets. He sees potential in the company and has a strong case to expand its business overseas.
Many board members in their sixties or seventies share a different opinion. They feel that entry into overseas markets is too risky. Pitting against major players in overseas markets would place unnecessary strain on current resources. Why take the risk?
In spite of opposing majority views, Steven never gave up on his thought to leverage on the company’s expertise to gain presence in new markets. He has proposed to set up subsidiaries to carry out business’ expansion ventures with local partners. This would limit the risk and financial exposure of the existing company. Doing so would allow the business to expand in international markets quickly, without having to learn about new countries, markets, laws and regulations from scratch.
He is confident that his plan would generate more profits from increased revenue and greater economies of scale. To contain the business within the Singapore and Malaysia markets would be a massive oversight. What not aim for more?
In the past few years, Steven has raised this subject with the board on many occasions, but was met with strong opposition each time. As a result, Steven feels that the company has lost out on many opportunities for growth.
While the concerns of most board members are not completely unfounded, Steven feels that they are too conservative. He feels that they are more concerned with the short-term viability of the company over its long-term sustainability and growth. He feels stifled by their reluctance to move ahead with his business strategy to position the company globally.
The board even engaged a team of management consultants to lend an unbiased perspective about the company’s future direction. But management consultants can only go as far as offer their view. They have no direct control over the eventual course of actions taken by the company. This is a typical case where board members cannot reach a consensus on the business’ direction.
Finding a voice in the boardroom
Disputes that arise among shareholders can be draining on a personal and business level. Even though Steven’s business expansion plans offer promising outcomes, he could not convince board members that it would not hurt the company.
He feels compelled to buy out the shares of some board members to have greater voting rights in making key business decisions. But this would be an uphill task as the board does not have a buy-sell agreement in place. In the absence of a legally-binding agreement, Steven can expect hard-nosed negotiations about the value of the business, terms of payment, and the length of the buy-out period with board members whom he hopes to buy out. Chances are it would spiral into yet another round of conflicts that could erode the company’s reputation and value.
Such an episode could have been avoided if all board members had signed a buy-sell agreement to ascertain terms and conditions in advance. It would have provided the mechanism for disputes to be resolved more quickly, by means of being able to buy out board members with lesser fuss.
The buy-sell agreement would make provision for a fair valuation process for transfer of shares. It will ensure a smooth transition of ownership for Steven, while taking care of the interest of board members who will leave the company. It would be a win-win under any circumstances.
This story is a reminder that not having a buy-sell agreement can be a stumbling block. Apart from facilitating a smooth business ownership transition, a buy-sell
agreement also offers grounds for options to be made to fund the buy-sell agreement in anticipation of future buy-outs. This is just a matter of time.
It can also ensure that remaining partners in the company are offered transfer of ownership upon a partner’s death, permanent disability or voluntary departure. This eliminates the possibility of a third party, spouse or child assuming partial ownership of the business.
In this case, the fate of the company is still undecided. One thing for sure is that Steven has a lot to consider before he can make the big step of expanding the business.
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