From time to time, so called "sleeping partners" can seek to assert their rights - and in turn cause tensions in a company or business. Our team at FWJ has the experts needed to deal with such a situation.
What is a sleeping partner?
A sleeping partner is a term used for a person who invests in a business but does not take a day to day role in the running of that business. Whilst the term technically refers to partners, it can, and often does, refer to an investor in a limited liability company too.
The goal of a sleeping partner is to invest in a company and obtain a return on that investment.
What issues arise with sleeping partners?
In a large company where there is a large board of directors who are clear on the direction of the company and run the business within the boundaries of companies legislation on a day to day basis, then the fact that there are investors in the business who don’t wish to get involved in the day to day running is not generally a problem. The company is pleased to receive the capital and the only expectation of the shareholder is a return on that capital by way of dividends at the end of the year.
Problems may arise with sleeping partners where there are just a few owners of the business however, particularly if they all have a similar shareholding.
At Francis Wilks & Jones we often see disputes arise when a few people decide to start up a business and invest in a company.
- in small or medium sized businesses, it is frequently the case that the directors are also the business owners, who run the company on a day to day basis;
- until the company is making significant profit, they are unlikely to take a proper salary, instead leaving the money in the company until they can be paid out of the company’s profits when these arise by way of dividends.
If at the end of the year all of the investors get equal returns on their investment by way of dividend, then this can cause resentment by the director or directors who are running the company, as they end up with the same remuneration as a sleeping partner who takes no managerial role in the company.
Alternatively, disputes may arise if a sleeping partner discovers that the other investor/directors take the company in a different direction to that agreed while they were not maintaining control over the day to day running of the company.
Remedies/preventative action
Shareholder agreements
It is vital for all shareholders to be fully aware of the expectations around their roles from the outset, to avoid misunderstandings and resentment and future disputes as far as possible. Whatever the type of company, it is important to set the shareholder-to-shareholder and shareholder-to-company relationship out at the very outset.
- A carefully drafted shareholder agreement can set out the role of shareholders and others, and can include details of how to deal with key issues as they arise, such as how shares are to be valued in the future, and on shareholders’ exit from the company, and on what basis shareholders may vote, as well as the expectation on management involvement.
- A shareholder agreement can provide for what to do in the case of shareholder and company disputes. Ultimately, if there is a relationship breakdown, the most likely remedy is for a shareholder to exit the company. This is a lot less painful if the details for this are clear in the shareholder agreement.
Director service level agreements
In circumstances where the sleeping partners are also directors, an SLA can be essential in ensuring that directors with day to day running of the company are remunerated properly and in accordance with the time that they put into the company.
Reliance on remuneration by taking the same dividends as sleeping partners can understandably quickly lead to problems among the partners. A well drafted service level agreement can set out the remuneration expectations of each director, as well as the role each is expected to play in the company. For more information on these, please get in touch with one of our team today.
At Francis Wilks & Jones we frequently act for shareholders and directors in all aspects of resolving disputes. The best remedy is of course prevention, and we regularly advise and assist companies in setting up a shareholder agreements. We can also assist in providing directors’ service level agreements as well as advising on all aspects of director’s remuneration. If you would like assistance on any of these issues, don’t hesitate to contact one of our friendly team today.
Supportive and friendly with partner-led involvement, I would recommend Francis Wilks & Jones to anyone facing a similar situation.
A shareholder we helped settle a remuneration dispute
