Shareholder and Partnership Agreements

While everybody may have the same goals and plans on day one of starting a business, circumstances can and do change over time. Many businesses have minimal paperwork at the outset, but as they grow and become more valuable there is more at stake for the owners and greater consequences if things don’t run smoothly. Whether your business is a a limited company or a partnership there are many benefits to having a formal shareholder agreement or partnership agreement drawn up at an early stage and here we will explain why this is so important.

If your business is a company owned by two or more shareholders, we recommend preparing a shareholder agreement right at the outset.  In most new businesses the shareholders will also be directors running the business, and you will all be working together to grow the business and build value.  Nobody is looking to exit, disputes are less likely and bringing in new shareholders can be quite an informal process.

As the business grows, shareholdings will be more valuable, differences of opinion may appear and eventually shareholders will wish to sell their shares and move on.  A shareholder agreement that was agreed in simpler times then becomes a valuable tool to avoid arguments and disruption.  If there is no shareholder agreement in place, the company’s Articles of Association will dictate the processes to follow and these are likely to be off-the-shelf defaults rather than rules tailored to the actual needs of the business.

Typical things that can be addressed in a shareholder agreement include the following.

• How disputes between shareholders should be resolved – Is this based simply on voting rights?  If there are equal shareholdings who will have a casting vote?  Should a third party be involved?
• How shareholdings are to be valued – Using an independent third party or using the balance sheet of the business? Should there be a discount for minority holdings?
• The process if a shareholder wishes to sell their shares – Should they be offered to existing shareholders first (this is known as pre-emption rights for the other shareholders)?  After all, you probably wouldn’t want an unknown 3rd party getting involved in the business without your consent.  If a majority shareholder sells their shares, are there tag-along or drag-along rights to ensure the sale of all of the minority shares too?
• What happens if a shareholder dies – the shares will need to be valued for probate and ownership may pass to someone unsuited or uninterested in running the business.  This could be very disruptive if they are a majority shareholder.
• Restrictive covenants – for example, to ensure that all the shareholders act in the best interests of the company and don’t compete with the company

For expert advice on all aspects of preparing shareholder agreements, contact Backhouse Solicitors today.

If your business is a partnership, we recommend that you draw up a formal partnership agreement (known as a partnership deed) to reflect the terms agreed between yourself and the other partners.  Without a partnership agreement in place, the rules in the Partnership Act 1890 apply, which as you can imagine are not tailored to the needs of a modern business.

Here are some of the default positions in the Partnership Act 1890 that you are stuck with if you don’t have your own agreement:

• All profits of the partnership are shared equally between partners, regardless of how much capital they have invested
• All partnership property is owned equally by the partners, regardless of capital
• All partners have a right participate in decisions, but none has an obligation to work in the partnership
• No management roles are defined and all partners have equal authority to bind the partnership in decisions and contracts
• Any partner can end the partnership by giving notice to the others
• All partners must agree in order to remove a partner (including the one being removed!)
• Death or bankruptcy of a partner automatically ends the partnership

To avoid the risk of an underperforming partner damaging the business, or an unexpected death dissolving the partnership, the answer is to draw up a partnership agreement at an early stage and to review it periodically.  The agreement will typically cover areas such as:

• How profits (and losses) should be split between partners
• How ownership of assets (and liabilities) is split
• How decisions should be made and how stalemates can be resolved
• Who will perform what role in the business
• How partners can leave or be removed and how new partners can join, without ending the partnership
• What happens on the death of a partner
• Restrictive covenants to ensure that all partners act in the best interests of the partnership and don’t compete with it

A partnership agreement should be a live document which is regularly reviewed and updated as the business grows and evolves.

Our Corporate and Commercial Team help many companies and partnerships solve their legal problems.  If you don’t yet have a shareholder or partnership agreement in place for your business then we are here to help.  We will work with you to understand how you would like the business to be run and put together an agreement which puts this down on paper and helps prevent future problems and disputes which might hold the busines back.  Contact us today to arrange a free initial consultation with one of our friendly, expert team.

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