Mediation: Helping Achieve Clarity in a Business Formation Process

“More important than the quest for certainty is the quest for clarity” – Francois Gautier

Sometimes relatives or good friends decide to go into business together. If they choose to form a corporation, they will need to prepare corporate documents and a shareholder agreement. If it is a partnership, a partnership agreement will probably govern the way business is done. As they sit down to formulate the way their new company would operate, these friend/relative partners often fail to take the time needed to discuss how to divide duties and responsibilities and/or how important decisions will be made in their new company.

Very often when things start out everything is wonderful. When Jeff and Susan decided to open up a deli, they wanted to do everything equally. After all, they are the best of friends and really think alike when it comes to running a business. They were both extremely excited with the prospect of having their own store and do not want to consider what would happen if they would disagree on an important matter, if one of them would become ill, or if one of them would no longer want to own a deli. When Jeff became gravely ill, Susan came to my office and we struggled, at the eleventh hour, to revise the buyout and disability provisions in a boilerplate partnership agreement, which failed to address any of these circumstances. We have found a way out, but it was a struggle that could have been avoided.

What often happens in small family businesses is that people come to a lawyer’s office and say, “We want to form a company.” The attorney then helps them prepare and file corporate documents and once they are done, drafts the agreement that describes how the business will be run. This lawyer usually represents the entity, which is being formed, and does not represent either of the partners. In other circumstances, the prospective partners informally visit an attorney who has had prior dealings with one of the partners. That lawyer drafts the partnership agreement based on what the parties instruct, but formally only represents the one partner. The other often chooses not to hire counsel; why waste money, if they trust each other? But the unrepresented partner is not adequately protected, the agreement is often boilerplate and it does not reflect contingencies which may occur in the partnership or the corporation.

In matters of business formation, mediation can serve as an effective tool to help partners identify potential areas of concern and figure out ways to address them to their mutual satisfaction. The partners can meet with a neutral attorney/mediator who is also familiar with what it takes to form a business or to draft a partnership or shareholder agreement. The neutral mediator can sit down with them and facilitate a conversation that will illuminate all the issues that could possibly come up in their co-ownership of this new business, deal with their concerns, and help them reach an agreement on each one of these items ahead of time so they know that if these points arise in the future, they have developed an effective mechanism for dealing with them. Once drafted, the partners can then share the draft with their individual attorneys, who can advise them as to whether the agreement really reflects what they want to do.

Using mediation during business formation provides a better, cleaner, more comprehensive approach and avoids inevitable conflicts of interest that may arise when an attorney for the entity or for one of the partners is asked to take on this role. The mediation process is also able to be effective, while maintaining the amicable relationship between the partners, and preventing them from feeling awkward about discussing and negotiating business terms with their best friend or close relative.