Perils of setting up a business without a written agreement

When setting up a business venture involving two or more people it is essential to have a written agreement so that everyone understands their responsibilities and entitlements.

Failure to do so can lead to confusion and the need for legal action, as illustrated in a recent case before the High Court.

It involved three people who set up a night club together.

Two of the men were business associates who had collaborated on other projects. They bought a nightclub and brought in a manager, who helped to set up the venture from the outset.

The manager controlled the day-to-day running of the club. He said he did so on the understanding that he was entitled to 33% “sweat equity” arising from his work contribution.

The two owners of the club denied they had ever made such an offer.

A meeting took place to try to resolve the issue and the owners offered the manager 5% equity based on his non-financial contribution. He refused the offer and insisted on 33%.

The court found in favour of the owners. It held that as there was no written agreement, it had to rely on the evidence put forward by both sides.

On balance, this suggested that the nightclub owners had seen the manager as a co-venturer but not a partner or shareholder. The issue of the manager being offered equity had been discussed but no agreement had been reached.

The manager’s claim to a share in the equity therefore had to fail.

Please contact Simon Porter if you would like more information about the issues raised in this article or any aspect of company law.