In the past, when writing about “corporate divorces” and disputes between business partners, I have stressed the importance of documentation and making sure that certain things are in writing. However, I have recently encountered a case making perhaps the best argument possible about the need for documentation – a co-owner claiming that his business partner did not actually own any interest in the company.
There are many closely-held companies out there in which the owners have never gotten around to issuing stock certificates. As ridiculous as it may sound, it may be the case that the only evidence one has of ownership is the tax returns of the company. Amazingly, the majority owner actually claimed in one recent case that the tax returns reflecting his brother’s ownership were inaccurate – a “mistake” by the accountant.
The novel (and absurd) argument is likely to go nowhere, but it has cost my client many months of unnecessary litigation, and an enormous amount in legal fees. However, much of this aggravation could have been avoided with a letter or an email from before the litigation started, asking why he was never issued his stock certificates.
There are numerous other things that could, and should, be documented somewhere. The exact percentage that one owns is an obvious fact to have documented. And, if a chief complaint is the absence of financial disclosure and sharing of documents, this is more easily proven if contemporaneous written complaints exist, rather than merely complaining after the fact. One of the more common issues that often needs to be proven, but is difficult to do without documentation, is the fact that you are not the one involved in any way on preparing financial information for inclusion in the company tax returns. Yes, the accountant may be able to corroborate this, but he may not. Often the accountant will have no idea how the documents that are delivered to him were prepared.
Disputes between business partners, even fights leading to a company’s demise, sometimes arise almost overnight. But, more often than not, the aggrieved shareholder has some inkling for years, or at least many months, that something may be amiss, or at least not quite right. No matter what you’re feeling toward your business partner, everything should be documented at all times.