Sunday, October 12, 2008

some things are better written up upfront

The Zandu pharmaceuticals controversy and public dispute could have been avoided had there been adequate discussion on what could be done in case a partner wanted to exit. Central to this case is the sale of 24% of the ownership by the co-promoter family (the other promoter being the Vaidya Parikh family) to the Emami group that has already collected 3.75% of the shares of Zandu. The Parikh family is aware of the tilt in the ownership and changing power equation of such an act.

How could this have been avoided?

To start with, all well drafted share ownership agreements provide for situations such as this when one or more co-promoters from same or partner families want to exit for whatever reason.
Often people do not envisage such a scenario to emerge at any time in future based on the existing sweet and smooth relationship. A good shareholders agreement would provide for exit option. Normally, other promoters or family members get the first right of refusal, at the then prevailing market price or valuation. Trouble erupts if there is no provision to handle such situations and relationships among promoters go for a spin.

Interestingly, people often do not recognize the need to have a clear shareholders agreement when their relationship is smooth. The next stage is when people feel concerned, but not willing to discuss in open with the stakeholders. In most cases, things remain at this stage for a long time, sometimes generations. However, if relationship goes through a bad patch, frustration to war is not too far, as prejudices and egos play spoil sport rapidly.

I normally ask families to develop/imagine best and worst scenarios of relationships when the business and family contexts undergo changes. Such scenario analysis done when the relationship is smooth can prevent many unpleasant situations in future. This could be part of improving family governance. Ideally, families should give the first right of refusal to other family members. The valuation is often slightly lower than the market price.

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