INSIGHTS
LEGAL AFFAIRS
Corporate governance
Settle disputes before they happen by
drafting effective governing documents
INTERVIEWED BY ADAM BURROUGHS
T
here are misconceptions that people
have at the outset of a business
relationship that, over time, can
present difficulties for the entity they create.
“People enter into a business partnership
believing that the relationship is premised
upon and strengthened by their personal
friendship, and that their personal friendship
will steer them through tough times,” says
Christopher Passodelis, Jr., a shareholder
and co-chair of the Litigation Services
Group at Sherrard, German & Kelly,
P.C. “Unfortunately, personal friendships
deteriorate rapidly when disputes arise as
to the direction of the company. That often
leads to hostility that pollutes and corrupts.
The reliance on friendship is misplaced and
needs to be taken out of the equation.”
When entering a business relationship,
he encourages partners to create governing
documents that set the rules that guide the
actions of a company from the start.
Smart Business spoke with Passodelis
about governing documents, why they are
important and what they should include.
affairs and long-term planning, how the
company would approach a sale event, and
how partners leave and new partners enter
the business, among other issues.
They can also set the rules for appointing a
board to oversee the business. It is best if the
board has an odd number of members who
are not closely affiliated with one partner or
the other so they can dispassionately help
resolve conflicts with minimal bias.
The process of dispute resolution among
shareholders must be addressed. The risk
of business failure is highest when partners
are focused on disputes among themselves
rather than minding the underlying business.
What documents should shareholders
prepare at the outset of a relationship?
Operating, Partnership and Shareholder
Agreements set the rules that guide how a
company will be run, creating, in essence,
a roadmap to follow as partners navigate
through various circumstances. These
foundational documents are otherwise
important because they force potential
partners to consider and discuss major
issues before entering into a formal business
relationship. This can help determine if the
two potential partners share similar goals. If
not, it is better to forgo a partnership before
money and time are wasted.
Governing documents dictate the ways in
which the company will manage day-to-day
What options do shareholders have when it
comes to dispute resolution?
To address disputes, build in a resolution
process that starts with each side presenting
their position at a special meeting with the
board to seek their guidance, relying on
their independence to decide what is in the
best interest of the company. That is akin to
an informal mediation.
The next step would be to retain an
independent mediator to guide the partners
to a resolution. Mediators are professionally
trained to help find common ground.
If that fails, some form of litigation is next.
Regardless of the approach — arbitration or
court — the struggles associated with this
last step are rarely worth the effort because it
36 Smart Business Pittsburgh | March 2017
CHRISTOPHER PASSODELIS, JR.
Shareholder,
Co-Chair, Litigation Services Group
Sherrard, German & Kelly, P.C.
(412) 355-0200
[email protected]
FOLLOW UP: Choose an experienced litigation team with a
proven track record of success. Learn more about our practice at
sgkpc.com/areas-of-practice/litigation-services-group.
COMPANY
RELATIONSHIPS
ARE BEST
SUPPORTED,
DEFINED AND
MAINTAINED
THROUGH
PROPERLY AND
FAIRLY CRAFTED
AGREEMENTS.
Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.
is such a caustic process.
To offer a way out for two partners who
cannot get along, an effective solution is to
include a ‘shotgun clause’ in the agreement.
This gives either party the option to make
an offer, to the other, to purchase his or her
shares, and the party receiving the offer then
has the opportunity to either accept the offer
or buy the other partner out for the same
amount. It can be a hard decision, but the
value that you preserve is higher than the
value that you lose in litigation.
When should legal counsel get involved?
Does each partner need a lawyer?
The most effective approach is to have the
company hire a lawyer who works to reach
an agreement that favors the company over
any other partner. Individual partners should
be represented by their own independent
counsel to ensure that they understand
the effect of the agreement. Working with
unbiased legal counsel in the formative
stages can ensure that the terms and
conditions in the governing documents are
clear and fairly applied to both parties.
Forming an enterprise is serious and
should be considered from every perspective
from the outset. Separate emotion from the
process and rely on governing documents
as the guide. When times get difficult, this
document will offer a logical way to resolve
problems. O
At Sherrard, German & Kelly, P.C., the
approach to the practice of law is simple and
direct: we provide responsive, high-quality and
cost-effective legal services to help our clients
evaluate and create ownership structures and
documents to facilitate business objectives and
to manage disputes.
A TRADITION OF INNOVATIVE LEGAL SERVICE
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