Investors in joint ventures, start-ups and other new business enterprises are increasingly turning to professional, legal counsel to ensure their interests are protected.  A professionally drafted shareholder agreement is a key component of this strategy providing investors with comprehensive protection against potential disputes and losses.

PJ Veldhuizen, MD of commercial law firm and dispute resolution specialist at Gillan & Veldhuizen Inc. explains the importance of air-tight shareholder agreements. “In today’s business environment, investors must take every precaution to ensure their investments are secure. A professionally drafted shareholder agreement provides a foundation for a successful business venture. The Texas Auction Clause, in particular, offers investors a comprehensive level of protection against potential disputes.”

The Texas Auction clause provides an effective tool for resolving shareholder disputes in 50:50 joint ventures, particularly when one or both partners wish to end the relationship. This clause stipulates that an initiating shareholder offers a price at which they will acquire the other shareholder’s shares. The other shareholder is then given the opportunity to offer the same amount in return for the purchase of the offeror’s shares in the company.  In cases where this is unsuccessful, an umpire may be appointed to oversee the offer or bidding process. The umpire then receives sealed bids from each party, which state the price at which they are willing to buy each other out. The highest bid ‘wins’, meaning the bidder must buy the other half-share in the business, and the ‘loser’ must sell their shares.

“The Texas Auction clause has both pros and cons,” says Veldhuizen. “On the plus side, it provides a quick and less expensive way to settle disputes between shareholders. On the downside, the clause can possibly limit the rights of shareholders to take legal action against one another.”

Overall, air-tight shareholder agreements put together by legal professionals are essential for investors to protect their interests in any business venture. The Texas Auction clause provides an additional layer of protection, ensuring that disputes are resolved swiftly and cost-effectively.