We all evaluate risk in our businesses—enterprise risk, credit risk, liability risk, etc. Designing and adhering to good governance practices should be part of any organization’s risk management processes.
Your corporate documents, particularly by-laws, shareholder/partner agreements, non-compete and non-solicit agreements, confidentiality agreements, and intellectual property assignment agreements are often overlooked. However, a little effort in this area can protect the company and its owners from unintended consequences that can impact the value of the organization.
What kind of risks might you assume? They include:
- Transactions such as dividends, bank borrowings, officer elections, and compensation and other corporate actions may be deemed to be unauthorized if your corporate documents are not properly adhered to.
- Shareholders/partners and businesses put their futures at risk by not anticipating and providing for the smooth navigation through the transfer of ownership within a closely-held business, family business, sales to outsiders, redemption issues, etc.
- Employees may leave the company and solicit clients and other team members.
Why don’t we spend more time evaluating the effectiveness of corporate documents or requiring employees to execute non-compete, non-solicit, confidentiality, and intellectual property assignments? There are two reasons:
- We don’t anticipate the unexpected. We think everything will be fine, we are successful, our team members and owners are all good trustworthy people, and we can work things out as they arise.
- We don’t understand and appreciate the full value of these documents.
In my experiences serving middle market companies, I have seen too many unfortunate situations related to the lack of respect for corporate documents. Most could have been mitigated with a little bit of attention.
Do you know what is in your by-laws and shareholder agreements? Are they relevant today? Do you comply with them?
If you would like to hear more, please contact me. If you have a story, please share.