In the dynamic world of tech startups, the partnership between a visionary systems developer and a capital-providing investor is often the engine of innovation. This collaboration, typically formalized through a Shareholders Agreement, governs everything from equity distribution to exit strategies. While such agreements are essential, they are also minefields of potential conflict if not carefully crafted. This article explores the key components of a typical investor-developer agreement, the inherent risks for both parties, and why this document is arguably the most critical in a startup’s early life.

Anatomy of a Critical Agreement

A well-structured Shareholders Agreement for a tech venture typically addresses several core areas:

Equity and Contribution Recognition: The agreement must clearly define the shareholding percentages, crucially acknowledging that the developer’s equity represents compensation for both past work and future contributions—a distinction that frequently becomes contentious during later funding rounds or exits.

Governance and Control: Through provisions for board composition and lists of “Substantial Decisions” requiring unanimity, the agreement establishes how day-to-day and strategic decisions are made. This balance of power is fundamental to the partnership’s stability.

Future-Proofing Mechanisms: Clauses addressing future investment (pre-emption rights), share transfers (drag-along, tag-along, and rights of first refusal), and exit scenarios provide the roadmap for the company’s growth beyond the founding partnership.

Operational Foundations: The developer’s role, commitment level, and crucially, the assignment of intellectual property (IP) to the company are non-negotiable elements that protect the venture’s core assets.

The Investor’s Calculated Risks

For the investor, the primary risk is capital deployment without commensurate control. An investor providing the majority of early funding but receiving only a minority stake (common when valuing a developer’s “sweat equity”) faces significant exposure. Key investor risks include:

• Operational Deadlock: If the agreement requires unanimity on too many decisions, a disgruntled or uncooperative developer can paralyze the company by refusing to approve essential actions, from hiring key staff to accepting a lucrative acquisition offer.

• Developer Disengagement: The developer may lose motivation post-equity grant or fail to meet development milestones, leaving the investor’s funds locked in a stagnant venture with no clear path to recourse.

• Dilution and Downside Protection: Without clear pre-emption rights, the investor’s stake can be severely diluted in future funding rounds. Furthermore, the investor typically bears the brunt of financial loss if the venture fails, while the developer’s primary loss is time and opportunity cost.

• IP Ownership Ambiguity: The most catastrophic risk is an unclear IP clause. If the developer retains ownership of the core code, the company—and thus the investor’s stake—is built on sand. The IP must unequivocally belong to the company.

The Developer’s Vulnerabilities

The developer often trades a market-rate salary for potentially lucrative equity, betting on the future. Their risks are different but equally severe:

• Loss of Creative and Technical Control: An investor with board control or aggressive drag-along rights can force technical decisions or even a company sale against the developer’s wishes, potentially compromising the product’s vision or integrity.

• Equity Erosion: Vague clauses on future investment can allow the investor to orchestrate funding rounds at unfairly low valuations, diluting the developer’s stake. Without strong tag-along rights, the developer can be left behind if the investor sells their shares to a third party.

• The “Golden Handcuffs” Trap: The developer’s shares are typically subject to lengthy vesting schedules tied to continued employment. If a dispute leads to their departure, they may forfeit a large portion of their equity—the very reward for their foundational work.

• Personal Liability for IP: If the IP assignment clause is not watertight, the developer could face future liability claims from the company or investors if any code is alleged to infringe third-party rights or was developed during prior employment.

Potential Flashpoints and Problems

Even with an agreement in place, several predictable problems can arise:

1. Valuation Disputes: The first major crisis often occurs during the first external funding round. The investor may push for a lower valuation to minimize dilution, while the developer argues for a higher one to reflect the progress made. The agreement’s lack of a precise valuation formula can lead to bitter conflict.

2. The “Vision vs. Viability” Impasse: The developer may insist on perfecting the system with new features (requiring more time and cash), while the investor demands a swift market launch to generate revenue. This fundamental tension over resource allocation can trigger deadlock on Substantial Decisions.

3. The Founder’s Dilemma in an Exit: When a lucrative acquisition offer arrives, the investor, seeking a return on investment, may be eager to sell. The developer, emotionally invested in the product and their role, may wish to refuse and continue growing the company. Drag-along clauses decide the winner of this standoff.

4. Defining “Reasonable Endeavours”: The developer’s commitment is often defined by this ambiguous phrase. Disagreements over whether the developer is working hard enough can degenerate into disputes about share vesting or even expulsion.

The Non-Negotiable Importance of the Agreement

Given these risks, viewing the Shareholders Agreement as a mere formality is a recipe for disaster. Its importance cannot be overstated:

• It Replaces Trust with Structure: While trust initiates the partnership, the agreement sustains it through predictable, transparent rules. It governs the relationship when trust is inevitably tested by stress, failure, or unexpected success.

• It Aligns Expectations: The process of negotiating the agreement forces both parties to confront and agree on difficult future scenarios before money and time are invested. This alignment is invaluable.

• It Protects the Company as a Separate Entity: A clear agreement reinforces that the venture is a distinct legal entity, not a personal project. This is vital for attracting future investment, avoiding personal liability, and ensuring the business can outlast the founders.

• It Provides a Path for Dispute Resolution: A well-drafted agreement includes mediation or arbitration clauses, offering a prescribed, less destructive path to resolve conflicts than immediate litigation.

Conclusion: A Pact for the Journey, Not Just the Launch

The ideal Shareholders Agreement between an investor and a developer is not a victory for one party over the other, but a balanced pact for the entire journey. It should fairly allocate not just equity, but also risk, control, and future opportunity. For the investor, it is a governance and risk-management tool. For the developer, it is a protector of their creation and their stake in its potential.

Both parties must enter negotiations with clear eyes, armed with independent legal advice. The cost of that advice pales in comparison to the cost of litigating a poorly drafted agreement later. Ultimately, the strongest agreement is one that both parties sign reluctantly, knowing it protects their essential interests while fairly binding them to a shared commitment: to build a successful company, together.

NIK ERMAN NIK ROSELI Commercial Lawyer

In the world of corporate ownership and management, the specter of a key shareholder facing serious criminal charges presents a serious crisis. Beyond the immediate personal and legal ramifications, such an event can trigger seismic operational, reputational, and financial risks for the company itself. To navigate this perilous scenario, many businesses rely on a critical, though often overlooked, provision within their foundational corporate document: the compulsory acquisition clause in the shareholders’ agreement.

This article explores the mechanism by which a company can forcibly buy out a shareholder charged with a crime, examining the protective framework of the shareholders’ agreement, the specific function of the compulsory acquisition clause, and the compelling rationale for its inclusion.

The Foundation: What is a Shareholders’ Agreement?

A shareholders’ agreement is a contract between some or all of the shareholders of a company. This agreement governs the internal relationships, rights, and obligations of the shareholders. It serves as a corporate rulebook, addressing issues such as:

Share Transfers: Rules for selling shares (rights of first refusal, drag-along/tag-along rights).
Decision-Making: Defining which decisions require a supermajority or unanimous consent.
Management and Board Composition: Outlining how directors are appointed.
Dividend Policies: Guidelines on profit distribution.
Deadlock Resolution: Processes for resolving major disagreements.
Protective Provisions: Clauses designed to shield the company from specific shareholder-related risks.

It is within this last category that the compulsory acquisition clause—often termed a “Bad Leaver,” “Forced Sale,” or “Redemption” clause —resides. This provision acts as a pre-agreed emergency exit, allowing the company or the other shareholders to purchase the shares of a shareholder under defined, critical circumstances.

The General Rule: No Acquisition without a Shareholders Agreement

Under the law, a share cannot be forfeited from a shareholder as it is the asset of that shareholder. Without a Shareholders Agreement, specifically a claus in the Shareholders Agreement that allows compulsory acquisition, a shareholder can continue to hold the shares of a company; even if convicted of a crime.

The Emergency Exit: The Compulsory Acquisition Clause

A compulsory acquisition clause is a contractual provision that grants the company or the remaining shareholders the right (and sometimes the obligation) to purchase the shares of a shareholder upon the occurrence of certain triggering events. While triggers can include insolvency, disability, or a breach of the agreement, one of the most significant is the criminal charge or conviction of a shareholder.

How It Works:
1. Triggering Event: The shareholder is formally charged with a serious criminal offense. Some clauses activate upon charge, while others may require a conviction.
2. Notice & Activation: The company or other shareholders serve formal notice to the affected shareholder, invoking the clause.
3. Valuation & Transfer: The clause will specify a method for determining the purchase price. Critically, in cases involving criminal acts, the price is often set at a discounted rate—commonly at fair market value or cost price, whichever is lower. The are even situations where the price is merely a nominal fee. This discount serves as a punitive and deterrent element. The shares are then transferred to the company (and typically cancelled) or to the other shareholders.

Benefits and Rationale: Why Have Such a Clause?

Including a compulsory acquisition clause for criminal charges is not about punitive action against an individual; it is a vital risk management tool for the collective protection of the company and its innocent stakeholders.

1. Reputational Safeguard: A company’s brand is one of its most valuable assets. Association with a shareholder accused of serious crimes like fraud, embezzlement, or corruption can lead to immediate and lasting reputational damage, eroding customer trust, partner relationships, and investor confidence. Compulsory acquisition allows for a swift, decisive separation.

2. Operational and Strategic Continuity: Criminal proceedings against a major shareholder create immense distraction and uncertainty. They can paralyze decision-making, especially if the shareholder holds a director role or veto powers. Removing the shareholder clears the path for stable, uninterrupted governance.

3. Preventing Hostile Influence or Asset Misuse: A shareholder facing charges may be tempted to use their ownership position to exert improper influence over company operations, access sensitive data, or divert assets for their legal defense. Acquisition neutralizes this potential for internal harm.

4. Protecting Licenses and Regulatory Standing: Many businesses operate under government licenses or in regulated industries (finance, healthcare, defense) where “fit and proper person” tests apply. A criminally charged shareholder can jeopardize the entire company’s regulatory standing, potentially leading to license revocation.

5. Maintaining Shareholder Harmony and Fairness: The clause ensures that all shareholders are subject to the same rules. It protects the interests of the diligent majority from the catastrophic fallout of one individual’s actions, which they did not condone and cannot control.

Example Applications in Practice

The application of such a clause is highly contextual but can be seen across various scenarios:

The Founder-Fraud Scenario: In a tech startup, a founding CEO and 40% shareholder is charged with securities fraud related to misrepresenting company performance to investors. The shareholders’ agreement triggers a compulsory acquisition at a steep discount. This allows the remaining leadership to immediately appoint a clean interim CEO, communicate transparently with stakeholders, and begin the arduous process of reputational repair without the charged founder’s lingering influence.

The Family Business Crisis: In a multi-generational manufacturing firm, a family member and significant shareholder is charged with a serious non-business-related crime that garners significant negative media attention. The clause is invoked to buy out their stake, allowing the family to publicly and legally distance the century-old business from the personal actions of one individual, preserving the brand for other family members and employees.

The Venture-Backed Company: A venture capital (VC) firm invests in a portfolio company. One of the other key investors in that company is charged with money laundering. The VC fund, bound by its own fiduciary duties and compliance policies, insists on invoking the compulsory acquisition clause in the shareholders’ agreement to sever ties and protect its investment and reputation.

The Reason Behind the Clause: Proactive Governance

Ultimately, the compulsory acquisition clause exists for the same reason companies buy insurance or implement crisis management plans: to prepare for the worst. It is an exercise in proactive corporate governance.

It transforms a potentially chaotic, litigious, and destructive situation into a structured, pre-defined process. By agreeing to the terms upfront, all shareholders consent to the rules of the game, including the penalty for actions that threaten the company itself. This provides legal certainty, expedites resolution, and allows management to focus on containing the crisis rather than negotiating an exit in the midst of scandal.

Conclusion

The compulsory acquisition of a shareholder’s stake due to criminal charges is a dramatic but sometimes necessary corporate intervention. Rooted in the prudent foresight of a well-drafted shareholders’ agreement, this clause is not merely a punitive measure but a vital defensive mechanism. It balances the rights of the individual shareholder with the paramount need to protect the health, reputation, and viability of the company as a whole. In an era where corporate reputation is fragile and regulatory scrutiny is intense, such clauses represent a critical tool for safeguarding the collective enterprise from the catastrophic fallout of individual misconduct. For any company with multiple shareholders, carefully crafting and understanding this provision is not an option—it is a fundamental aspect of responsible ownership and risk management.

NIK ERMAN NIK ROSELI Commercial Lawyer

The family business is a cornerstone of the global economy, representing a vast majority of enterprises worldwide. These companies often begin with a powerful blend of shared vision, deep trust, and unwavering commitment. However, when the informal kitchen-table dynamics of a family meet the formal, structured demands of a corporate boardroom, a unique set of governance challenges can emerge. For companies where family members serve as both shareholders and directors, these issues can threaten not only the business’s success but also the family’s harmony.

The Core Governance Issues in Family Companies

1. Blurred Lines Between Family and Firm

The most fundamental issue is the entanglement of family roles (parent, sibling, cousin) with corporate roles (CEO, director, shareholder). A father may struggle to critique his son’s poor performance as a department head. A decision about reinvesting profits can turn into a heated family argument about who needs a larger dividend to buy a house.

Example: The “Generational Handover Gridlock.” The founding patriarch, still the Chairman, is reluctant to cede operational control to his well-prepared daughter, the appointed CEO. He overrules her strategic decisions in board meetings, citing his “experience,” while she feels undermined. This confusion of parental authority with corporate authority paralyzes decision-making and demotivates non-family executives.

2. Absence of Formal Governance Structures

Many family firms operate without basic governance documents like a robust shareholder agreement, a clear dividend policy, or a formal board with independent directors. Disputes are settled emotionally, not procedurally.

Example: The “Dividend Dilemma.” Three sibling shareholders are also directors. One, active in the business, wants to reinvest all profits for growth. The other two, passive shareholders, need steady dividend income. Without a pre-agreed dividend policy, every board meeting becomes a conflict, with personal financial needs clashing with business strategy, leading to resentment and potential deadlock.

3. Entitlement vs. Meritocracy

The presumption of a “birthright” to a leadership position or employment can lead to incompetent family members occupying key roles, demoralizing qualified non-family talent and hampering performance.

Example: The “Underperforming Heir.” A son is promoted to Sales Director despite a clear lack of aptitude, blocking a talented non-family manager. This leads to declining sales, high staff turnover in the department, and whispers of nepotism that damage the company’s internal culture and external reputation.

4. Succession Planning: The “Third Rail”

Discussing succession is often emotionally charged, seen as discussing mortality or choosing favorites. Without a clear, documented plan, the transition of leadership and ownership can trigger destructive power struggles.

Example: The “Surprise Vacuum.” The founder passes away unexpectedly without a will or succession plan. The resulting chaos sees multiple family members vying for control, banks becoming nervous, key employees leaving, and the company’s value plummeting as the family engages in public litigation over ownership and leadership.

5. Shareholder Disputes and Exit Mechanisms

As generations expand, the shareholder base grows. Some may be active, others passive. Conflicting visions for the company’s future (sell, grow conservatively, take big risks) are inevitable. Without mechanisms to manage these differences or provide a fair exit, disputes can escalate.

Example: The “Cousin Consortium.” The second-generation siblings who built the business want to acquire a competitor. Their cousins, who inherited shares but have no involvement, object to the risk and want to sell their stake. There is no shareholder agreement outlining drag-along/tag-along rights or a valuation method for a buyout. The dispute stalls the acquisition and fractures the family.

The Universal Prescription: Strategic Legal Counsel

While family therapists and business consultants play valuable roles, the foundational solution to these intertwined family-business challenges lies in seeking expert legal advice. A lawyer specializing in corporate governance and family business acts as a neutral, professional architect, building the structures that allow the family and the firm to thrive.

How a Lawyer Provides the Framework for Solutions:

1. Drafting a Comprehensive Shareholder Agreement:

This is the cornerstone document. A lawyer will help tailor it to address core family business issues:

Decision-Making: Defining which decisions require a supermajority or unanimous vote (e.g., selling the company, taking on massive debt).

Dividend Policy: Establishing a clear, formula-driven policy to separate personal income from business investment.

Share Transfer Rules: Instituting rights of first refusal, drag-along, and tag-along rights to control ownership and prevent shares from falling into outside hands.

Valuation Mechanism: Setting a pre-agreed method for valuing shares for buyouts, eliminating future disputes.

Dispute Resolution: Mandating mediation or arbitration before litigation, protecting both the business and family relationships from the courtroom.

2. Professionalizing the Board of Directors:

A lawyer can advise on incorporating independent, non-family directors into the governance structure. These individuals bring objectivity, expertise, and credibility, helping to separate family dynamics from business strategy and holding management accountable.

3. Crafting a Clear Succession Plan:

Legal counsel ensures the succession plan is not just a discussion but a legally sound roadmap. This integrates estate planning (wills, trusts) with corporate governance, facilitating a smooth transition of ownership and leadership while minimizing tax implications.

4. Establishing Family Employment Policies:

A lawyer can help draft clear, merit-based criteria for family members seeking employment, including required qualifications, reporting structures (often to a non-family manager), and performance review processes. This formalizes meritocracy.

5. Providing Objective Mediation:

When conflicts arise, a trusted lawyer who understands the family’s governance framework can often act as a mediator, guiding discussions back to the agreed-upon rules rather than personal grievances.

Conclusion: From Family Kitchen to Boardroom Table

The greatest strength of a family business—its deep-rooted relationships—can become its greatest vulnerability without proper governance. The journey from an informal family operation to a professionally managed, enduring institution is paved with deliberate structure. By engaging skilled legal counsel to implement shareholders’ agreements, independent boards, and clear policies, family businesses can build a resilient framework. This framework does not replace trust; it protects it. It allows the family to debate as shareholders and directors around the boardroom table, and then sit down together as a family at the dinner table, having secured both their legacy and their harmony. The single most prudent investment a family business can make is in the professional advice that will help it write the rules of the game before the game begins.

NIK ERMAN NIK ROSELI Commercial Lawyer

In today’s digital-first economy, your business systems—the custom applications, automated workflows, and proprietary software that drive your operations—are the central nervous system of your business. They encode your unique processes, house your critical data, and directly impact your agility and valuation. Yet, a dangerous and prevalent assumption is crippling countless businesses: the belief that if they pay for a system to be built, they automatically own it. This misconception isn’t just a technicality; it’s a strategic vulnerability that can capsize your company’s value and operational sovereignty.

The Third-Party Trap: When Your “Partner” Holds the Keys

Hiring a third-party developer or agency is a common and often sensible path to building technology. The peril begins not in the hiring, but in the contracting. Without explicit, clear agreements, the system you fund, design, and depend on may never legally belong to you. The developer often retains intellectual property (IP) rights by default. You might have a license to use it, but you do not own it. This creates a cascade of existential risks:

1. Vendor Lock-In & Hostage Scenarios

Your ability to modify, update, or even maintain the system is forever chained to the original creator. They can dictate escalating fees, withhold critical source code, or simply disappear, leaving your business with an unsupportable, “black box” application.

2. Crippled Exit & Valuation Erosion

During acquisition or investment due diligence, the discovery that core operational IP is owned by a third-party is a major red flag. It drastically devalues your company. You cannot sell what you do not own. An acquirer isn’t just buying your revenue; they’re buying your assets, and your most critical digital assets may be non-transferable.

3. Operational Brittleness

When urgent fixes or competitive adaptations are needed, you cannot direct another team to act. You are stuck in a service queue, watching your market agility evaporate.

4. The Data Delusion – Your Most Precious Resource Isn’t Yours

This ownership crisis extends far beyond code into what is arguably more valuable: your data. The customer profiles, transaction histories, process efficiencies, and market insights generated within a system you don’t own are frequently trapped. While you may access the data via a user interface, the underlying database, the raw data export capabilities, and the legal right to port that data to a new platform are often controlled by the vendor.

You are not building your own data asset; you are merely populating their system. This violates a fundamental principle of the digital age: Data is a strategic asset. If you cannot freely access, integrate, and leverage your complete dataset, you are operating with blinders on, unable to apply advanced analytics or AI, and vulnerable to catastrophic loss if the vendor relationship sours.

5. From Assumption to Assurance – The Non-Negotiable Contractual Bridge

The bridge from vulnerability to security is not technical; it is legal. Ownership must be explicitly decreed, not politely assumed. When engaging any third party to create technology for your business, the contract must contain unambiguous clauses that:

5.1 Assign Full IP Ownership

Clearly state that all work product, including source code, object code, databases, designs, documentation, and any associated intellectual property, is a “work made for hire” and is the exclusive property of your company from the moment of creation.

5.2 Guarantee Source Code Escrow & Accessibility

Mandate that full, commented source code and all necessary documentation be delivered regularly to a neutral third-party escrow agent or directly to you. This is your insurance policy against the developer’s bankruptcy or non-cooperation.

5.3 Secure Perpetual, Unrestricted Data Rights

Contract for your company’s irrevocable right to all data generated, in a structured, industry-standard format, with provisions for complete data portability and vendor cooperation during migration.

The Imperative Next Step: Protect Your Digital Keystone

Your proprietary systems are the keystone of your business value and operational integrity. Treating their creation as a mere procurement task is a profound strategic error. The single most important action you can take is to formalize protection before a single line of code is written.

This is not a matter for casual email agreements or handshake deals. It is a foundational business necessity that requires expert legal counsel. A qualified technology focused lawyer will craft the agreements that transform your investment from a risky vendor dependency into a durable, ownable, and valuable company asset.

Do not build your castle on rented land. Before you embark on your next system development project, prepare a comprehensive agreement with a lawyer. Ensure that what you build is unequivocally yours—in code, in data, and in law. Your company’s future valuation and operational freedom depend on it.

NIK ERMAN NIK ROSELI Commercial Lawyer

When you’re facing a legal issue—whether it’s a divorce, a business contract, a property dispute, or even a traffic ticket—it’s natural to want to save money. After all, lawyers can be expensive. So, you might be tempted to go with the cheapest option you can find. But here’s the truth: paying less upfront for legal help can end up costing you far more down the road.

Think of it like this: Would you trust the cheapest mechanic to fix your car before a long road trip? Or the least experienced contractor to build your home’s foundation? Legal matters are just as important—and often more complex—than these everyday decisions. Choosing a lawyer based solely on price can lead to serious, expensive consequences.

1. Inexperience Leads to Mistakes

Cheap lawyers are often inexperienced. They may have just started practicing, or they may not specialize in the area you need help with. This means they’re more likely to make mistakes—missed deadlines, poorly worded documents, or failure to follow proper legal procedures. And in law, even small errors can have big consequences.

For example, if you’re signing a business contract and your lawyer doesn’t spot a hidden clause that limits your rights, you could lose thousands—or even your entire business—later on. Fixing those mistakes later often costs far more than hiring a skilled lawyer would have in the first place.

2. They Don’t See the Risks You Can’t See

A good lawyer doesn’t just do what you ask—they think ahead. They ask, “What could go wrong?” and “How can we protect you from future problems?” An inexperienced or low-cost lawyer may simply give you what you want (like a quick settlement or a fast divorce) without considering what you actually need (like long-term financial security or clear ownership rights).

Legal issues are rarely black and white. A skilled lawyer knows the common pitfalls in your situation because they’ve seen them before. They’ll help you avoid traps that seem invisible now but could cost you dearly later.

3. “Cheap” Often Means Incomplete

Low-cost legal services may cut corners to keep prices down. They might use generic templates instead of customizing documents to your situation. They might not research local laws thoroughly or fail to consider how your case fits into the bigger legal picture.

For instance, in a Shareholders Agreement, a cheap agreement might look fine on paper—but if it doesn’t account for what each party is bringing into the business, what are their expectations, the best way to exit, what specific risks for each shareholder which could lead to disputes and unnecessary court battles.

4. You Pay Twice (or More)

When things go wrong because of poor legal advice, you often have to hire another, more experienced lawyer to fix the mess. That means paying again—sometimes two or three times what you would have paid for quality help from the start. And in some cases, the damage can’t be undone at all.

Imagine losing your home because a poorly drafted lease agreement didn’t protect your rights as a landlord. Or losing custody of your child because your divorce paperwork missed a critical detail. These aren’t just financial losses—they can change your life forever.

The Smart Choice: Invest in Experience

Paying a fair price for a knowledgeable, experienced lawyer isn’t an expense—it’s an investment. A good lawyer saves you money by:

• Preventing costly mistakes
• Spotting hidden risks
• Offering practical, real-world advice
• Protecting your rights now and in the future

They understand not just the law, but how it works in practice. They’ve handled cases like yours before. They know what judges look for, what opponents might try, and how to build a strong, lasting solution—not just a quick fix.

Bottom Line

When it comes to legal matters, cheap can be expensive. Don’t let short-term savings lead to long-term regrets. Take the time to find a qualified lawyer who understands your situation, communicates clearly, and has a track record of success. In the end, that’s the best way to protect your time, your money, and your future.

NIK ERMAN NIK ROSELI Commercial Lawyer

When I did my chambering around 20 years ago, 1 of the many things that I needed to learn was to key-in my billable hours. Although they didn’t really make it a bit deal for pupils, it was something that we had to do and it was strictly enforced with the lawyers at the firm. For decades, the legal profession has operated primarily on an hourly billing model—clients pay for the time a lawyer spends on their matter. While this approach may seem transparent at first glance, it often leads to unpredictability, budget anxiety, and misaligned incentives. In recent years, a growing number of forward-thinking law firms have shifted toward fixed-fee arrangements, offering clients a more transparent, efficient, and client-centered alternative. For individuals and businesses alike, engaging a lawyer on a fixed-fee basis can deliver significant strategic and financial benefits.

1. Predictable Budgeting and Cost Control

Perhaps the most immediate advantage of fixed-fee billing is cost certainty. Clients know upfront exactly how much they will pay for a defined scope of legal work—whether it’s drafting a shareholders agreement, incorporating a business, handling a real estate transaction, or managing a specific litigation phase. This eliminates the anxiety that often accompanies hourly billing, where final invoices can far exceed initial estimates due to unforeseen complexities or inefficiencies.

With fixed fees, clients can plan their legal expenditures as part of their overall financial strategy. Small businesses, startups, and individuals operating on tight budgets especially benefit from this predictability, as it allows them to allocate resources more effectively without fear of surprise legal bills.

2. You Pay More for Inexperience using Billable Hours

For the same legal task, an experienced specialist might complete the work in just 2–3 hours, while a junior or less-experienced lawyer could take 9–15 hours. Because billing is often time-based, clients may end up paying significantly more for work done by a less-experienced attorney—even though the outcome is the same. In contrast, seasoned lawyers who have handled similar matters before can accurately estimate the scope and duration of the work. This expertise makes them better suited for fixed-fee arrangements, which can offer clients greater predictability, better value, and access to higher-quality legal representation.

3. Value Based Service + Promotes Efficiency

Under the hourly model, there’s an inherent tension: the more time a lawyer spends, the more they earn—even if that time doesn’t add proportional value. This can unintentionally discourage efficiency. In contrast, fixed-fee arrangements align the lawyer’s interests with those of the client. The lawyer is incentivized to resolve matters efficiently, apply best practices, leverage technology, and avoid unnecessary work—all while delivering high-quality results and value to the client.

This alignment fosters a more collaborative relationship. Clients feel confident their lawyer is focused on outcomes, not billable hours, which builds trust and encourages open communication.

4. Greater Transparency and Reduced Administrative Burden

Hourly billing often requires clients to scrutinize detailed time logs, questioning entries like “reviewed documents” or “conference call.” This can strain the attorney-client relationship and consume valuable time. Fixed fees remove this friction. Clients receive a clear scope of services tied to a single price, reducing the need for constant oversight or invoice disputes.

Moreover, fixed-fee engagements typically include a well-defined statement of work, outlining exactly what is—and isn’t—included. This clarity minimizes misunderstandings and sets realistic expectations from the outset.

5. Encourages Innovation and Efficiency

Lawyers working on fixed fees are motivated to streamline their processes. Many adopt legal technology, standardized templates, and project management tools to deliver consistent quality while controlling their own costs. These efficiencies often translate into faster turnaround times and more responsive service for clients.

For routine or repeatable legal matters—such as contract reviews, employment agreements, or compliance filings—fixed fees enable law firms to offer scalable, high-value services that might otherwise be cost-prohibitive under hourly billing.

6. Facilitates Strategic Legal Planning

When legal costs are predictable, clients are more likely to seek legal advice early—before small issues become expensive crises. Fixed-fee models lower the psychological and financial barrier to proactive legal counsel. A business owner, for example, may be more inclined to have a lawyer review a partnership agreement upfront if they know the cost in advance, rather than risk a costly dispute down the line.

Some firms even offer subscription-based fixed-fee packages for ongoing legal support, giving clients continuous access to counsel for a flat monthly rate. This transforms legal services from a reactive expense into a strategic business function.

Not a One-Size-Fits-All Solution—But a Powerful Option

It’s important to note that fixed fees work best for matters with a clear scope and predictable workflow. Complex litigation or highly uncertain regulatory matters may still require hourly or hybrid billing. However, even in those cases, savvy firms often break engagements into phases with fixed fees for each stage, providing partial predictability.

Clients considering fixed-fee arrangements should ensure the scope is clearly defined in writing and discuss how changes or unforeseen complications will be handled. A reputable lawyer will welcome this conversation—it’s part of delivering transparent, client-focused service.

Conclusion

The shift toward fixed-fee legal services reflects a broader trend in professional services: clients demand value, predictability, and partnership—not just time spent. By choosing a fixed-fee model, clients gain financial control, foster better collaboration with their lawyers, and position themselves to use legal counsel more strategically. In an era where efficiency and trust are paramount, fixed fees aren’t just a billing alternative—they’re a smarter way to engage legal expertise.

NIK ERMAN NIK ROSELI Commercial & Sports Lawyer

Dalam kes mahkamah Malaysia baru-baru ini, beberapa pemilik perniagaan yang membayar untuk menjalankan perniagaan menyaman pemberi perniagaan atas perjanjian perniagaan yang gagal. Mahkamah memutuskan bahawa perjanjian perlesenan itu tidak sah dan tidak sah dari awal, menyebabkan kedua-dua pemilik perniagaan dan pemberi perniagaan mengalami kerugian besar. Berikut ialah pecahan ringkas tentang perkara yang berlaku, sebab ia penting, dan cara mengelakkan perangkap yang serupa.

Apa yang Silap?

Pemberi perniagaan menjual “perjanjian pelesenan” untuk mengendalikan perniagaan F&B yang popular. Bagaimanapun, mahkamah mendapati perjanjian perlesenan itu sebenarnya adalah perjanjian yang memiliki kriteria-kriteria sebuah francais. Di bawah Akta Francais Malaysia, francais mesti berdaftar dengan kerajaan sebelum ia boleh beroperasi. Memandangkan Syarikat tidak pernah mendaftarkan francais, perjanjian tersebut diisytiharkan tidak sah .

Pemilik-pemilik perniagaan membayar sejumlah besar (RM50,000–RM200,000 setiap satu) untuk perjanjian ini, atas dasar kepercayaan mereka membeli peluang perniagaan yang sah. Tetapi kerana perjanjian itu tidak sah, Mahkamah mengarahkan pemberi perniagaan membayar balik yuran pelesenan.

Lebih teruk lagi, peguam yang merangka perjanjian itu didapati cuai kerana gagal:

• Terangkan perbezaan antara “lesen” dan “francais”.
• Nasihatkan pemilik perniagaan bahawa francais yang tidak berdaftar adalah haram.
• Pastikan perjanjian itu sah di sisi undang-undang.
• Tuntutan balas pemberi perniagaan (untuk penalti dan royalti) telah ditolak.

Pengajaran untuk Pemilik Perniagaan

Kes ini menyerlahkan kesilapan kritikal yang melibatkan masa, wang dan reputasi. Inilah yang anda boleh pelajari:

1. Ketahui Perbezaan Antara Lesen dan Francais

Francais : Sistem di mana pemberi francais memberikan hak untuk mengendalikan perniagaan di bawah jenama, sistem dan kawalan mereka.
Lesen : Perjanjian yang lebih mudah, seperti membenarkan seseorang menggunakan tanda dagangan atau produk anda tanpa kawalan perniagaan penuh.
Perkara utama: Jika perjanjian anda termasuk peraturan yang ketat (seperti SOP, pembelian mandatori atau yuran royalti), ia berkemungkinan francais. Francais WAJIB didaftarkan di bawah Akta Francais.

2. Sentiasa Semak Pendaftaran Francais

Minta francaisor untuk mendapatkan bukti pendaftaran dengan Pendaftar Francais.
Jangan sekali-kali menandatangani perjanjian tanpa mengesahkan pematuhan. Francais yang tidak berdaftar adalah menyalahi undang-undang, dan kontrak mereka terbatal.

3. Jangan Berkira Melantik Peguam

Pemilik perniagaan dalam kes ini bergantung kepada peguam pemberi perniagaan, yang gagal menjelaskan risiko atau memastikan kesahihannya. Pastikan anda sebagai pemilik perniagaan mendapatkan nasihat peguam sendiri.

Lantik peguam anda sendiri untuk menyemak perjanjian. Tanya soalan seperti:

• Adakah ini francais atau lesen?
• Adakah mereka berdaftar?
• Apa yang berlaku jika perjanjian itu diisytiharkan tidak sah?

4. Elakkan Perjanjian “Cut-and-Paste”.

Mahkamah mengecam peguam pemilik perniagaan kerana merangka perjanjian yang kelihatan seperti francais tetapi dilabelkan lesen.

• Sesuaikan perjanjian agar sesuai dengan struktur perniagaan anda.
• Pastikan klausa (cth., yuran royalti, penalti) sejajar dengan undang-undang.

Bagaimana Peguam Boleh Membantu Anda Mengelakkan Bencana Ini

Peguam yang hebat bukan hanya untuk “apabila berlaku masalah”—mereka adalah barisan pembelaan pertama anda. Begini cara mereka boleh melindungi anda:

Untuk Francaisor / Pemberi Perniagaan

• Daftar francais anda dengan Pendaftar Francais sebelum menawarkannya kepada orang lain.
• Draf perjanjian yang mematuhi undang-undang yang memenuhi keperluan Akta Francais.
• Jika perniagaan anda belum bersedia untuk francais, apakah yang boleh dilakukan oleh perniagaan anda untuk menyediakan francais.
• Nasihat tentang dokumen pendedahan (cth., sejarah perniagaan, yuran) yang diperlukan oleh undang-undang.

Untuk Francaisi / Pemilik Perniagaan

• Semak perjanjian untuk mengesahkan perjanjian itu sah dan adil.
• Terangkan hak anda (cth., klausa penamatan, penalti).
• Rundingkan syarat untuk mengelakkan sekatan atau kos yang tidak adil.

Untuk Kedua-dua Pihak

• Menjalankan audit undang-undang yang kerap untuk kekal patuh apabila undang-undang berubah.
• Mengantara pertikaian awal untuk mengelakkan pertempuran mahkamah yang mahal.

Bawa Pulang Akhir

Kes ini adalah panggilan untuk pemilik perniagaan di Malaysia. Sama ada anda memfrancais atau membeli francais:

• Ikut Akta Francais —pendaftaran adalah wajib.
• Jangan sekali-kali menganggap perjanjian adalah sah berdasarkan labelnya (“lesen” vs. “francais”).
• Di bawah Akta Francais, “francais” ditakrifkan oleh elemen tertentu:
  – Memberi hak untuk mengendalikan perniagaan di bawah sistem (cth., SOP, penjenamaan).
  – Penggunaan harta intelek (cth., tanda dagangan, rahsia perdagangan).
  – Kawalan berterusan ke atas operasi (cth., pematuhan mandatori dengan manual).
  – Pembayaran yuran (cth., yuran pelesenan, royalti).

Jika unsur-unsur ini wujud, perjanjian itu adalah francais tanpa mengira namanya. Mahkamah i tidak terikat dengan label pilihan pihak (cth.“lesen”) tetapi sebaliknya meneliti sifat sebenar perjanjian itu.

Sentiasa berunding dengan peguam yang memahami undang-undang francais.

Pelaburan kecil dalam nasihat undang-undang hari ini boleh menjimatkan anda.

NIK ERMAN NIK ROSELI Commercial Lawyer

Having things put in writing is critically important in a business context—especially from a legal standpoint—for several compelling reasons. Written agreements serve as the foundation of enforceable rights and obligations, reduce ambiguity, and provide protection for all parties involved. Below are the key reasons why written documentation is essential from a legal and business perspective:

1. Legal Enforceability

• Proof of agreement: Under Malasyian law, verbal contracts are still valid and enforceable contracts. The problem with verbal contracts is when it comes time to prove the contract. A written contract serves as tangible evidence that an agreement exists, what its terms are, and who the parties are. Without it, proving the existence or content of a verbal agreement can be extremely difficult.

2. Clarity and Precision

• Reduces ambiguity: Written agreements force parties to clearly define terms such as payment, deliverables, timelines, responsibilities, and dispute resolution mechanisms. This minimizes misunderstandings and over reliance on a persons memory to remember what was agreed.
• Avoids “he said, she said” disputes: When terms are documented, there is a clear reference point, reducing the risk of conflicting interpretations.

3. Protection of Rights and Interests

• Defines rights and obligations: A written contract explicitly outlines what each party is entitled to and what they must do. This protects both parties from overreach or unmet expectations.
• Intellectual property, confidentiality, and non-compete clauses: These sensitive provisions are only effective when clearly stated in writing and signed by the parties.

4. Accountability

• By having it in writing, it promotes a culture of accountability as what is promised is reduced in writing. Persons who negotiated and signed the contract will have to take responsbility for the contract they have entered. This reduces finger-pointing and blaming culture if something goes wrong.

5. Dispute Resolution and Litigation

• Easier resolution of disputes: Courts and arbitrators rely heavily on written contracts to interpret intentions and enforce terms. A well-drafted written agreement can prevent litigation or streamline it if it occurs.
• Admissible evidence: Written contracts are primary evidence in legal proceedings. Verbal agreements are harder to prove and may not be admissible in certain cases.

6. Professionalism and Credibility

• Builds trust: A written agreement demonstrates professionalism and seriousness, fostering trust between business partners, clients, and investors.
• Facilitates due diligence: Investors, lenders, and auditors often require written contracts to assess the stability and legality of business operations.

7. Long-Term Record Keeping

• Creates a historical record: Written documents serve as a reference for future dealings, renewals, audits, or employee onboarding. The person who negotiated and signed the contract may not be the same person that will be around during the execution of the contract.
• Essential for corporate governance: Board resolutions, shareholder agreements, and partnership deeds must be in writing to be valid and transparent.

8. Prevention of Costly Mistakes

• Avoids misunderstandings that lead to financial loss: Ambiguities in verbal agreements can result in missed deadlines, unpaid invoices, or incomplete work—costly errors that could have been prevented with a written contract.
• Saves time and legal fees: Clear written agreements reduce the need for legal intervention down the line.

Conclusion:

From a legal perspective, if it’s not in writing, it may as well not exist—especially when disputes arise. Written agreements are not merely formalities; they are essential tools for risk mitigation, legal protection, and ensuring smooth business operations. In litigation, the written word often carries far more weight than oral testimony. Therefore, businesses must prioritize putting all significant understandings and agreements in writing, ideally reviewed or drafted by legal counsel, to safeguard their interests and ensure enforceability under the law.

Nik Erman Nik Roseli Commercial Lawyer

Running a family business is unique. Husband & Wife; Siblings; Father & Children. It blends deep personal bonds with complex commercial realities. While trust and shared history are powerful assets, they aren’t always enough to navigate the inevitable challenges that arise. That’s where a Shareholders Agreement becomes essential. Think of it as your family business’s private rulebook – a clear, agreed-upon plan for handling tough situations before they happen.

You might be wondering, “What is a shareholders agreement?” Simply put, it’s a written agreement between the people who own shares (owners) in the business. It sets out the rules for how the business will be run, how decisions are made, and what happens if someone wants to leave or if a problem arises.

Here’s why every family business should have one:

1. Prevents Conflicts Before They Start

Even in close families, disagreements can happen—especially when money and emotions are involved. A shareholders agreement helps avoid misunderstandings by clearly stating everyone’s rights and responsibilities. It sets clear rules for making big decisions (like taking loans, buying property, or changing strategy). It might say certain choices need a 75% majority vote, preventing one sibling from blocking progress or forcing unwanted change. It provides a fair process for resolving deadlocks, like bringing in a neutral advisor.

Example: Imagine two brothers own a family restaurant. One wants to expand and open a second location; the other wants to keep things small. Without an agreement, this could lead to arguments. But if the agreement says that major decisions need both owners to agree, it forces discussion and compromise—before things get heated.

2. Protects the Business If Someone Leaves or Passes Away

In a family business, shares (ownership) are often passed down or shared among relatives. But life is unpredictable—someone might retire, get divorced, move away, or sadly pass away. When this happens, their shares in the business don’t just disappear. Without a plan, those shares could end up in the hands of someone who has no connection to the business or doesn’t understand it.

This can create serious problems.

Example 1 – Death of a Shareholder

Imagine a father owns 50% of a family hardware store, and his two sons own the rest. The father suddenly passes away. In his will, he leaves his shares to his wife (the boys’ mother), who has never worked in the business and doesn’t want to be involved. Now, she legally owns half the company. She might not understand business decisions, or worse—she might want to sell her shares to someone outside the family. That could mean an outsider suddenly has major influence over the business.

If it was a Muslim, his shares will be divided using Shariah (Faraid) which could mean the wife and children will get portions of the shares in the company.

But if there’s a shareholders agreement, it can say:

“If a shareholder dies, their shares must first be offered to the other owners before anyone else.”

This gives the two sons the chance to buy their father’s shares and keep control in the family.

Why This Matters:

Without a plan, the business can be at risk—not because of poor management, but because of personal life events. A shareholders agreement acts like an insurance policy. It doesn’t stop life from happening, but it helps the business survive it.

3. Keeps the Business in the Family

A shareholders agreement can include a “right of first refusal.” This means that if someone wants to sell their shares, they must first offer them to the other family owners. This helps ensure the business stays in the family.

Example: A cousin decides to leave the family construction company and wants to sell his 25% share. The agreement says the other family members get the first option to buy it. This prevents an outsider from becoming a part-owner and possibly influencing business decisions.

One of the biggest dreams for many family business owners is to keep the company within the family for generations. But without clear rules, it’s easy for ownership to slip out of the family’s hands—sometimes in just one generation.

A shareholders agreement helps make sure that only family members (or approved people) can become owners.

How It Works – The “Right of First Refusal”

This is a common rule in shareholders agreements. It means:

If someone wants to sell their shares, they must first offer them to the other shareholders at a fair price. Only if the others say no can they sell to someone outside the family.

Example 1 – A Cousin Wants to Cash Out

Four cousins run a family car repair shop. One cousin decides he wants to leave the business and use his money to start a restaurant. He could simply sell his 25% share to a stranger—but that stranger might want to change how the business runs or demand profits without lifting a wrench.

With a shareholders agreement, the rule is:

“You can sell your shares, but first you must offer them to your cousins.”

Now, the other three cousins can choose to buy his share and keep full family control.

Example 2 – An Heir Who Doesn’t Want to Be Involved

A grandfather leaves his 40% share in the family farm to his granddaughter. She lives in the city, works in IT, and has no interest in farming. She might want to sell her shares quickly—possibly to a big corporation that could change the farm’s values or even shut it down.

But if the shareholders agreement says:

“Family shares must be offered to other family owners first,”

then the rest of the family gets a chance to buy her share and protect the business they’ve worked so hard to build.

Bonus Protection – “Tag-Along” and “Drag-Along” Clauses

Some agreements also include special rules:

Tag-Along Right: If one family member sells their shares to an outsider, the others have the right to join the sale and sell their shares too. This protects minority owners from being stuck with a new, unwanted partner.

Drag-Along Right: If a majority owner sells the business, they can require minority owners to sell too—helping avoid roadblocks during a big opportunity.

Why This Matters:

Keeping the business in the family isn’t just about money—it’s about values, tradition, and legacy. A shareholders agreement helps ensure that the business your family built stays in trusted hands, even as life changes over time.

4. Sets Clear Rules for Decision-Making

In a family business, it’s easy for personal relationships to mix with business decisions. A shareholders agreement helps separate the two by outlining who gets to make key decisions—like hiring, spending money, or changing the business direction.

Example: Three siblings run a family bakery. One wants to invest in expensive new equipment. The agreement says big purchases need approval from at least two owners. This stops one person from making costly decisions alone.

Example: Certain business operations are managed by 1 sibling but the eldest sibling always overrules the younger siblings. The Shareholders Agreement will help separate family decision making with business decision making.

5. Plans for the Future (Succession & Exit)

The Problem: The founder (father) is nearing retirement. He has 3 children but only 1 is working with him. The 1 child working with the Father feels entitled to the business but the other 2, although not involved in the business has indicated they want a share once the father retires.

How the Agreement Helps: It provides a framework for succession planning. It can outline the process for selecting future leaders, criteria for management roles, and how voting power might transition. Crucially, it establishes how shares will be valued if an owner retires, dies, or wants to leave. This avoids bitter fights with family members.

There may be instances where children grow up, they may want to join the business. But not all family members may be ready or qualified. A shareholders agreement can set rules about who can become a shareholder and under what conditions.

Example: A grandfather wants his grandson to join the family printing business. The agreement says new family members must work in the business for at least two years before they can own shares. This ensures only committed and experienced members become owners.

6. Makes It Easier to Resolve Disputes

Even with the best intentions, conflicts happen. A good shareholders agreement includes a process for solving disagreements—like mediation or arbitration—so problems don’t end up in court.

Example: Two sisters disagree on how to price products. Instead of arguing for months, the agreement says they’ll bring in a neutral third person to help them decide. This saves time, money, and family relationships.

It’s Not About Distrust, It’s About Protection & Love

Creating a Shareholders Agreement isn’t a sign that your family doesn’t trust each other. It’s the opposite! It’s a practical, loving step to protect the business you’ve built together and preserve your family relationships when times get tough (and they often do in business and life).

By agreeing on the rules while everyone is getting along, you build a stronger foundation. You ensure that disagreements are handled fairly and efficiently, transitions are smooth, and the legacy you cherish is protected for generations to come. Think of it as essential insurance for both your family and your business. Talk to a lawyer experienced in family business to draft one tailored to your unique situation – it’s one of the smartest investments you can make.

Tip: It’s best to create this agreement when things are going well, not during a crisis. Sit down together, talk openly, and consider getting help from a trusted advisor or lawyer to draft the agreement in simple, clear language.

By planning ahead, your family business can thrive for generations—without the stress of avoidable conflicts.

NIK ERMAN NIK ROSELI Commercial Lawyer +60192912453 nik@law-aka.com