Top 10 mistakes shareholders make in doing business and building relationships with business partners and the company's CEO
- Mistake #1: do not use the tools available to protect your interests and not to document the agreements reached
- Mistake #2: do not monitor the work of the CEO
- Mistake #3: do not draw up the list of company affiliates and do not monitor the transactions in which there is an interest of the company affiliates
- Mistake #4: do not hold the annual general meeting of shareholders
- Mistake #5: do not keep copies of key documents
- Mistake #6: do not introduce a trade secrets regime
- Mistake #7: do not issue the relevant documentation for the intellectual property
- Mistake #8: If your company does not have basic documentation
- Mistake #9: do not conduct due diligence upon selection of a counterparty and do not have clear regulations for dealing with account receivables
- Mistake #10: do not take into account tax and other risks in business transactions
Most lawyers dream of helping clients to avoid problems. However, the reality is that many clients seek a lawyer's assistance once serious consequences have occurred.
I have compiled 15 years of my legal practice and am sharing with you a list of "harmful advice" that causes shareholder losses:
| Mistake #1: do not use the tools available to protect your interests and not to document the agreements reached. |
| Mistake #2: do not monitor the work of the CEO. |
| Mistake #3: do not draw up the list of company affiliates and do not monitor the transactions in which there is an interest of the company affiliates. |
| Mistake #4: do not hold the annual general meeting of shareholders. |
| Mistake #5: do not keep copies of key documents. |
| Mistake #6: do not introduce a trade secrets regime. |
| Mistake #7: do not issue the relevant documentation for the intellectual property. |
| Mistake #8: If your company does not have basic documentation. |
| Mistake #9: do not conduct due diligence upon selection of a counterparty and do not have clear regulations for dealing with account receivables. |
| Mistake #10: do not take into account tax and other risks in business transactions. |
Mistake #1: do not use the tools available to protect your interests and not to document the agreements reached
The risk of a corporate dispute or even a wrongful takeover arises when you are not the sole owner of a company and are working with a business partner(s).
The key documents which are used to regulate corporate dispute are the Articles of Association and shareholder’s agreement. But in practice there are a lot of cases when shareholders do not have shareholder’s agreement and sigh a «template» Articles of Association.
На практике самой распространенной ошибкой является регистрация так называемого «типового Устава» и отсутствие корпоративного договора, когда в нем есть необходимость.
Here are basic recommendations of REVERA how to reduce risks:
- Chose the appropriate legal form for your business.
Read my article with comparison of legal forms such as LLC, CJSC and OJSC, here is the link.
- Do not use a «template» Articles of Association and document the key agreements with your business partner (partners), including shareholder’s agreement, option agreement.
Believe me, the cost of law services for drafting the Articles of Association, shareholder’s agreement is much less than for resolving corporate dispute. Choose the law company which has a long-term experience of drafting such documents.
- Conduct legal due diligence before acquisition of the company.
- If the company is registered to the nominal shareholder, you should have documents confirming your rights in case of his death.
- Use other instruments depending on the specific situation.
Contact REVERA to get consultation how to protect your interests in business.
REVERA is specialized in setting-up companies, drafting the Articles of Association and shareholder’s agreements. Likewise REVERA represents the interests of the client in corporate disputes and protects rights of the client in case of illegal takeover.
Mistake #2: do not monitor the work of the CEO
There are a lot of cases when the CEO make transactions against the interests of the company and the shareholders can not dismiss him or her.
The key documents which are used to regulate the relationship between shareholders and the CEO are the Articles of Association, employment contract and local legal acts of the company.
Here are basic recommendations of REVERA how to reduce risks:
- Do not use a «template» employment contract with the CEO. It is the most important document, which regulates employment relationship with the CEO.
- Control the expiration of the employment contract with the CEO. In the Republic of Belarus a fixed-term employment contract may transform into an employment contract for an indefinite period.
- Sign a non-disclosure agreement with the CEO.
- Hold the annual general meetings with the consideration of the CEO’s report for the last year.
- Elect the Board of Directors (for large companies).
- You may transfer administrative issues to the managing company under a service agreement.
- Use other instruments depending on the specific situation.
Contact REVERA if you need drafting the employment contract with the CEO or documents to dismiss the CEO, drafting option agreement, local legal acts of the company or consultation about concluded transactions. Furthermore. REVERA provides services as a managing company.
Mistake #3: do not draw up the list of company affiliates and do not monitor the transactions in which there is an interest of the company affiliates
There are a lot of cases when the CEO make transactions with the company affiliates against the interests of the company.
Here are basic recommendations of REVERA how to reduce risks:
- Draw up and update the list of company affiliates. Draw up the local legal act which regulates the issues of relationship between the company and its affiliates.
- The Articles of Association should include the list of criteria when a company affiliate has an interest in a transaction to be concluded by the company.
- Hold the annual general meetings with the consideration of the CEO’s report for the last year.
Contact REVERA to know how to protect the interests of shareholders when conclude transactions with affiliated persons.
Mistake #4: do not hold the annual general meeting of shareholders
Some companies do not hold an annual general meeting of shareholders.. As a result, the shareholders do not have the reliable information about financial situation of the company and copies of key documents. The problem occurs in case of corporate conflict or in case of conflict with the CEO.
Here are basic recommendations of REVERA how to reduce risks:
- Appoint an internal auditor in the company who prepare the report for the annual general meeting.
- Hold the annual general meetings with the consideration of the CEO’s report for the last year.
Contact REVERA if you need drafting the documents for the annual general meeting.
Mistake #5: do not keep copies of key documents
Shareholders have the right to receive the information about economic activity of the company. But in case of conflict with the CEO it is difficult to obtain such information.
Here are basic recommendations of REVERA how to reduce risks:
- The Articles of Association should include the familiarization procedure with the information and documents of the company.
- Keep copies of the company's key documents (the Articles of Association, employment contract with the CEO, minutes of general meetings on key issues, local legal acts etc.).
Mistake #6: do not introduce a trade secrets regime
The trade secret regime includes both documentation and organizational, technical measures to protect information in the company. The common mistake is absence of trade secret regime in the company or when the company approves the local legal act about trade secret regime, but it is not used. As a result, it is impossible to recover damages caused by illegal disclosure of trade secrets. If your company does not win tenders, perhaps there is a leak of information?
Here are basic recommendations of REVERA how to reduce risks:
- Develop a trade secret regime, taking into account the specifics of the economic activity of the company and its business processes. Make changes to the company's business processes, taking into account the approved regime. Take technical measures to protect information in the company.
- Draw up documentation on the organization of the trade secret regime (Regulation on Trade Secrets, the form of a non-disclosure obligation with employees and confidentiality agreements with counterparties, etc.). The documentation should reflect the actual regime and provide for a mechanism for the protection of trade secrets, taking into account law enforcement practice.
- To approve the regulations for working with the register of shareholders (for joint-stock companies).
Contact REVERA if you need drafting the documents to protect information in the company.
Mistake #7: do not issue the relevant documentation for the intellectual property
IP protection includes both the registration of a trademark (service mark) and the registration of rights to the software developed by employees or contractors, product design and other intellectual property.
The lack of documentation confirming the rights to the IP is found both in startups and in companies which are in the market for a long time. Most often this is found when there is a need to protect the IP from the third parties, or when selling a company and conducting legal due diligence. By this time, some of the employees, who were involved in development of the IP, no longer work for the company. As a result, there are difficulties in protecting IP rights, company losses, as well as a decrease in the total value of the company or even a failure to purchase it.
Here are basic recommendations of REVERA how to reduce risks:
- Include in employment contracts and job descriptions provisions governing the procedure for the development of IP, conditions and terms of transfer of IP rights to the employer. Draw up documentation regulating the development of IP (job assignment etc.). Provide for similar provisions in outstaffing contracts.
- Work out in detail the terms of the contracts with contractors for software development.
- If an unregistered IP is found, conduct IP legal due diligence and restore the missing documentation, submit documents for IP registration.
- When opening a new office, check the possibility of using IP in the territory of foreign country.
- Monitor the validity of the trademark registration certificate, license agreements and take timely measures to extend and update them.
- Limit the powers of the director to dispose of the IP.
Contact REVERA if you need drafting the documents to protect the IP of the company or conduct legal due diligence.
Mistake #8: If your company does not have basic documentation
Each company has a different document flow. However, there is a list of documents that every company must have and the absence of which may be a reason for initiating the government inspection or a source of other problems.
In practice, the problem is both the absence of such documents and using templates which are not adapted to the specifics of the economic activity of the company and its business processes.
Here are basic recommendations of REVERA how to reduce risks:
- Develop personal data management documentation. Make changes to the company's business processes, taking into account the legal requirements on the order of personal data processing.
- Approve and familiarize employees with the internal labor regulations, job descriptions, labor protection documentation.
- Work out in detail the templates of the contracts which are used in current business activities of the company taking into account law enforcement practice.
Contact REVERA if you need drafting the documents for personal data processing.
Mistake #9: do not conduct due diligence upon selection of a counterparty and do not have clear regulations for dealing with account receivables
The lack of a well-developed mechanism for checking counterparties and consistent work with receivables leads to the failure of transactions, the emergence of uncollectible receivables, including when the debtor reorganizes to evade debt repayment.
Here are basic recommendations of REVERA how to reduce risks:
- Approve and implement in the company's business processes the verification of counterparties. In case of a major transaction to collect information about the counterparty in the process of executing the contract.
- Approve the Regulations on work with receivables.
- In case of a complex dispute and the risk of considerable losses to start correspondence with the counterparty only after developing a legal defense strategy.
REVERA holds webinars for clients to share detailed recommendations on the work and collection of receivables.
Mistake #10: do not take into account tax and other risks in business transactions
One of the most considerable sources of the company's losses is the lack of detailed elaboration of risks when making MA transactions, splitting up the business, applying preferential tax regimes, transactions with affiliates etc.
Here are basic recommendations of REVERA how to reduce risks:
- When making management decisions on business transactions that entail tax consequences, involve legal counsel, specialists of the company's financial service or external consultants.
The value of legal services lies in understanding the risks and ways to minimize them, knowledge of law enforcement practice, as well as the ability to negotiate and formalize the agreements reached in documents that will stand in court. Practice has shown that the involvement of a lawyer at the initial stage considerably saves costs compared to the involvement at the stage when the problem already exists. Timely consideration of tax risk, strict compliance with currency, antitrust and other legislation will save a lot of time and resources of the company.
Dear journalists, the use of materials from REVERA website in publications is possible only after our written permission.
For approval of materials please contact e-mail: i.antonova@revera.legal or Telegram: https://t.me/PR_revera
