John F Kennedy made this observation in his 1962 State of the Union address to propose economic reforms while the US economy was in a positive state, rather than waiting for a recession to hit.

His quote goes beyond mere fiscal preparedness, however, and can be applied to life in general; from literal roof repair to having a will in place (see Wills and Estate Planning - MP Legal ) to – for the purposes of this article – preparing to start a business with a business partner.

A later public figure, who usually shares more in common with one of President Kennedy’s red-capped successors, has been nonetheless just as cautionary about futureproofing. In 2005, Kanye West suggested that “if you ain’t no punk” then you should certainly consider the benefits of a “­pre-nup”. His views on what happens in the absence and aftermath are well set out and are not necessary to repeat here, but again the point made is that the best time to prepare for the worst when entering into a mutual partnership is when all are in agreement at the beginning.

Mr West’s prospects on the relationship in question, and the motivations of the other party, are – as a matter of record – significantly pessimistic in nature, however. Most people entering into business together do so not with a view on how the relationship might end in disaster, but on the potential success in between.

When we first meet with clients looking to establish, conversation is primarily focused on the same; the excitement of the set-up including share division, dividend rights, and company activity. We draft memoranda, articles and minutes all in preparation for the life of the business, and wish our clients the best of luck in their endeavours.

However, at some point, advice must turn to one of the most frequently overlooked and arguably most important documents in nascent enterprises; the shareholders’ agreement. Like Mr West’s advised “pre-nup”, a shareholders’ agreement is a document to be entered into in preparation for the worst. That is not to say it has no use for the lifetime of the business; they most often contain key provisions relating to the appointment of directors, the admission of further shareholders and what might happen in a sale.

However, I would argue that its real strength comes from the fact that it prepares for failure, with its pre-agreed processes on what to do if the worst comes to worst. Just like home insurance, run-flat tyres and life jackets, a shareholders’ agreement is something that we never hope to use, and as a result might feel expensive at the outset, but which becomes worth its weight in gold if ever put into use.

It is a peacetime accord to avoid a later war; agreed to by cool and calm heads who – at the point of agreement – usually had all parties’ best interests in mind.

I have always felt that there is a great psychological benefit in parties agreeing a shareholders’ agreement at the outset, especially when its processes get put into place. Rather than begrudgingly accepting (or, in some cases, rejecting) the judgment or instruction of a third party, or grappling with feelings that the process or decision has been biased, unfair or prejudiced, parties can glean significant comfort from the knowledge that an earlier version of themselves – not someone else – agreed to the resolution.

However, the difficulty for many – especially in justifying the expense at the outset – is that most often the benefit of a shareholders’ agreement is felt in its absence. For a lot of shareholders, that realisation comes too late when deadlock results in five/six figure disputes and shattered relationships, or when a stubborn hanger-on loses the business the deal of a lifetime. Family finances and relationships are ripped apart when acrimonious arguments are forced through a battle of legal correspondence and proceedings, rather than through a process which comes with the reassurance that earlier, calmer heads had already considered and accepted the process and outcome.

The benefit we have in our role as advisors is that we have seen it all before, and can (perhaps ironically to some) guide you towards putting something in place which can significantly reduce your legal bills in future. It is often said, for good reason, that in a shareholder dispute the only winners are the lawyers.

We act for the shareholders who, too late, come to us at their wits end in a position where everything has been attempted and they want to know what is left to be done. The answer, more often than not, is little other than expensive negotiation.

We act for the once-bitten shareholders who insist they will never go into business without an agreement again. For us they are the most convincing testimonials, in a position we hope our clients do not find themselves.

And we act for the new and optimistic entrepreneurs, with whom we share Mr West’s wisdom; “its something that you need to have, ‘cause when [the relationship deteriorates, there is significant risk that your losses will outweigh what you have put into the business]”… Or words to that effect.

Advocate Lorcan O’Mahony is a director of M&P Legal and heads its corporate and commercial department. He has experience both in private practice and as in house counsel. This article is not legal advice, please take specific advice on the facts of each situation.

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