Small business clients often ask me my opinion on whether legal templates provide adequate protection for their business. It’s a difficult question to answer. Legal templates are fast becoming the norm for small business. It seems a month can’t go by without a new legal template company launching into the online space.
I understand the attraction for the entrepreneur; it’s a scalable business model and, with the right disclaimers, one that seems to carry little risk. I also understand the attraction for the business owner; templates provide a legal solution on a small budget. In fact, if the templates are well-drafted then they may put the business owner in a better position than either (a) having no protection at all, or (b) creating their own documents by combining examples found on the internet.
The question, however, is whether the reduced legal costs at the outset really create additional costs for the business owner down the track.
For example, we often see clients who have come to us after using template Shareholders Agreements. While these templates may clarify statutory obligations for company officers and shareholders, they often do not proactively manage the specific risks of the business. Nor have I seen a good example of a template Shareholders Agreement that clearly outlines each individual’s rights and responsibilities in relation to their specific business. In most cases, they also don’t provide for any meaningful dispute resolution or exit process.
Why is this important? Here is a story by way of example; Naomi owns a cafe with a friend of hers, Sarah. Naomi and Sarah were no longer getting along and Sarah stopped showing up for work. Her lack of attendance meant the ability for the business to produce income was greatly compromised; yet the overheads, of course, remained the same.
Sarah had access to company accounts and was continuing to draw a wage. Naomi is concerned that if things didn’t change then the business she had spent her life savings creating would be insolvent within months.
In addition, Naomi had great plans for expansion that could’ve seen profits triple, and had a new partner who was willing to come on board to help her.
When Naomi and Sarah incorporated their company and set up shop, they had downloaded a template Shareholders Agreement in order to save on legal fees. This meant that the Shareholders Agreement was effectively useless for their situation. As equal shareholders, the agreement did not address how to deal with disputes. In addition, there was no mechanism for determining the value of shares, and the prospective new partner’s due diligence revealed that the market value of the business was basically nil.
Sarah quickly realised that she was in a strong bargaining situation because Naomi just wanted her ‘out’. She also believed in the expansion and wanted to remain a shareholder in order to claim her piece of the pie. The only options were either to liquidate and for Naomi to start all over again (less the liquidator’s fees), or to negotiate a way out of the business relationship. These options were not ideal and were at best quite expensive.
As such, an attempt to save money at the outset of the business meant that someone in Naomi’s situation had to spend more money trying to resolve an issue that should’ve, with a tailored Shareholders Agreement, been able to be managed.
The lesson here in my opinion is to think about the purpose of template legal documents and in particular, to think about whom we are trying to help. Is it the client or is it ourselves? If it’s the latter, then perhaps as a profession we need to take responsibility for the position we may be putting our well-intentioned, although potentially naive, clients in. That is, they also need to understand the risks.
Lawyers spend years at university for a reason; to develop a strong skill set that includes the ability to draft contracts that both properly reflect the commercial scenario and reduce risk for our clients. In my opinion these skills cannot in their entirety be replaced by templates.
I’m not denying that in some instances templates have their place, but perhaps only in relation to basic generic documents such as website user agreements, which require little if any tailoring.
Perhaps the answer is a combination of commoditised legal services and tailored services. The future is up to us.
Mira Stammers has worked as a banking solicitor since 2007 in Melbourne and London, and is the founder of Legally Yours.