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Shareholder Disputes in the Restaurant Industry
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Shareholder Disputes in the Restaurant Industry The recent high court case of Gunewardena v Conran Holdings Limited, in which Desmond Gunewardena (DG), a former business partner of Sir Terence Conran, unsuccessfully sued him for £3m in respect of shares previously held by DG in Sir Terence’s restaurant business, illustrated how dramatically business relationships in the restaurant industry can deteriorate under immense pressure.
Barney Leaf Partner | Corporate barney.leaf@laytons.com +44 (0)161 214 1600
John McDermott Solicitor | Corporate john.mcdermott@laytons.com +44 (0)161 214 1600
Shareholder Disputes in the Restaurant Industry | January 2017
In the current climate, in which celebrity chefs are feted like the rock stars of old, and a seemingly endless array of cookery shows and books create an impression of achievable success, opening a restaurant with some like-minded people can seem an attractive proposition. This informality works well in the ordinary course of your business life but it can be a distinct burden when it comes to actually owning or running a business that has hitherto been merely an enjoyable obsession. Unfortunately, in some cases, the passion for great food comes before the knowledge of how to run a successful commercial venture. In other instances, buying into a hobby has a way of making people forget the sound business practice and discipline they have exercised in other walks of life. Business acumen and experience are set aside and people walk into problems that they would normal identify early and avoid. Partnerships in the restaurant industry are some of the most likely to experience turbulence. The blurring of the lines between work and hobby, along with the high overheads and cut-throat competitiveness of the market, is in fact a seeding ground for shareholder disputes. When they happen they are, at best, a distraction that damages the success of the business. When they escalate to full scale boardroom splits the restaurant itself can be doomed to failure.
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Shareholder Disputes in the Restaurant ndustry | January 2017
An owners’ dispute is often like a matrimonial break-up in as
This process has a spiralling effect which is only intensified in
much as they often have no logic or reason attached to them.
a highly competitive industry, with the associated pressures
What’s more, each of the parties will want to “win”, regardless
that brings, and only adds to the chances of failure. What you
of the damage or the cost. The dispute is essentially ego-
had initially invested in, as part pleasure and part work, is now
driven, with sound business reasoning left out of the decision
losing money and has become more of an annoyance (at
making process.
best) rather than a pleasure. All you really want to do is leave.
When the owners start up a new venture, they can rarely
When disputes become terminal, they can be hard to handle
conceive of a future where the relationship might change and
without an agreed exit strategy. The necessity of a shareholder
they start to fall out, or even envisage a situation where they’d
agreement may seem like basic common sense when you’re
want to go their separate ways and cease to be in business
in a dispute but in the first flurry of business when people
together.
are first setting out in partnership, are the best of friends and are working in an exciting, new and fresh environment, it’s
While different industry sectors contain different types of
something that’s often seen as completely unnecessary.
people, the process of a dispute is common to all. The process of a dispute will start with a relatively minor difference or issue
New ventures are often so overwhelmed with the here and
but the relationship often becomes so damaged so quickly
now, and the enormous amount of effort which is needed to
that any contact turns into a confrontation that leaves the
start the business, that the overall strategy takes a back seat.
relationship unworkable.
Important things like creating an effective plan for how the business will go forward if one owner decides to exit are often overlooked.
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Shareholder Disputes in the Restaurant Industry | January 2017
At the same time, certain clauses in a shareholders agreement
The reason that you partly chose to invest in a restaurant will
can become areas of manipulation. For example, the
mean that it has a higher likelihood of failure. Often people
document will probably describe the circumstances that can
buy into a restaurant for many of the wrong reasons, instead
be deemed as a trigger to force the sale of your shares. This
of it being purely good business sense to make the purchase.
can often have catastrophic ramifications and could result in
However, investments can go wrong and relationships can fail,
you losing your ownership in the restaurant.
but it doesn’t have to be a bloodbath. Just make sure that you are fully informed about both the pitfalls and opportunities
Being a director of a restaurant business will carry the same
before you enter into the venture, and ensure that the
obligations and implied laws that govern directors of any
necessary shareholder/partner/member exit agreements are
other business – and the breaches that mean an individual
in place. This will make the process a lot more straightforward
can be removed as a director. That said, there is no obligation
and will set clear boundaries and guidelines for people
to sell or buy your shares unless it is specified in the articles
looking to exit the business. It will also actually protect the
of the company or a shareholders agreement. This is very
most valuable asset that all the shareholders /partners have;
unsatisfying for the departing and remaining shareholders/
the restaurant - regardless of whether you are leaving or
directors.
staying.
Business relationships can breakdown for the same reasons as marriages. Times change and you may no longer believe that your co-owners want the same things that you do; you may not believe your business partner is pulling their weight, contributing like you or there might be a discovery of an event that you regard as an irreparable breach of trust.
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Commercial & Corporate
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