A Shareholder’s Agreement or a Partnership Agreement is an important document to have within your business and is considered a cost-effective way of reducing the risk of any issues arising. It sets out terms that detail how various matters will be dealt with, providing a forum for dispute resolution should an issue arise down the road.
What is a Shareholder’s Agreement?
A shareholder’s agreement is entered into by all the shareholders in a company. It regulates the relationship between them, states how some decision making must be conducted, demonstrates the ownership of the shares and gives protection to the shareholders.
Most shareholder’s agreements will illustrate how many shares each party owns and how much they’ve invested in the company. The agreement will typically outline what will happen if a shareholder wants to sell their shares, what happens if the majority shareholder wants to sell the company and how other parties can join into the shareholder’s agreement in the future.
If your business is a company owned by two or more shareholders, it is wise to draw up a shareholder’s agreement at the outset. Although everybody may have the same goals and plans on day one, circumstances may change over time. One party may wish to sell their shares, and if disputes are to be avoided, it is very important that you have agreed procedures for valuing their shareholdings and deciding who can purchase the shares. It is particularly important to have a shareholder’s agreement in place where there are two shareholders who each own 50% of the shares, as a process needs to be in place for what happens if the parties are in a deadlock over a decision.
What happens if you don’t have a Shareholder Agreement?
Without an agreement in place, both the company and the individual shareholders could be exposed to unresolvable conflict in the future. A shareholder agreement will clarify the legal standpoint of each party if there is a dispute or a deadlock situation occurs.
What is a Partnership Agreement?
A partnership agreement is between two or more persons (partners). The formal Partnership Deed is drawn up to reflect the terms and conditions agreed by yourself and the other partners, under which you will operate a for-profit business partnership.
Things to consider when drawing up the agreement:
- Who the partners are
- The division of shares
- How profits and losses are shared
- The time each partner is expected to invest in the business
- Which assets shall belong to the company, and which are retained by individual partners.
We recommend that a partnership agreement is signed on day one and reviewed periodically to take account of any changes within the business such as the inclusion of new partners.
What could be the consequences without a Partnership Agreement in place?
If there is no written partnership agreement in place, the partnership will automatically be governed by the provisions of the Partnership Act 1890. This is dated legislation and includes the requirement that, if one party wants to leave the business, the partnership must be dissolved. A partnership agreement outlines the rights, responsibilities, and duties that each partner has to the company and to each other.
Without an agreement in place, no partner has a claim to an asset used by the company. As such, on dissolution of a partnership without a written agreement, any assets will be sold and the proceeds used to pay off any company debts.
In the event of a dispute, the partnership may also need to be formally dissolved if a deed is not in place. You may also face difficulties and potentially, court action, to get rid of a disruptive partner.
What if it is a Limited Liability Partnership?
If you have a Limited Liability Partnership, you will still need an agreement which is a combination of a shareholder’s agreement and a partnership agreement. Limited Liability Partnerships (LLPs) are governed by separate legislation, but this also pulls in various provisions of the Partnership Act 1890 together with obligations placed upon directors under the Companies Act 2006. These can force the unfavourable terms we have outlined above on the members of an LLP, but having an LLP agreement in place can mitigate the effect of the legislation.
So that is why it is important to have a Shareholder’s or Partnership Agreement.
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