Having a Shareholder’s Agreement or a Partnership Agreement within your business is a cost-effective way of minimizing any issues which may arise, by making it clear how certain matters will be dealt with and providing a forum for dispute resolution, should an issue arise down the road.

What is a Shareholder’s Agreement?

A shareholder’s agreement is an agreement entered into between all the shareholders in a company. It regulates the relationship between the shareholders, how some decision making must be conducted, ownership of the shares, and the protection of the shareholders.

Most shareholder’s agreements will say 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 right at the outset. While everybody may have the same goals and plans on day one, circumstances will 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 as a whole and individual shareholders could be exposed to unresolvable conflict in the future. To avoid this, 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 an agreement between two or more persons (partners), setting out the terms and conditions under which they will operate a for-profit business partnership.

If your business is a partnership, you should ensure a formal Partnership Deed is drawn up to reflect the terms agreed between yourself and the other partners about how the business is to be operated.

Things to consider when drawing up a partnership 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 Partnership, and which are retained by individual partners.

We recommend that a Partnership Agreement is drawn up on day one and then reviewed periodically, to take account of any changes within the partnership, e.g. 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 requirement that if one party wants to leave the business, the partnership must be dissolved.   A partnership agreement outlines the rights, responsibilities, and duties 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 partnership. As such, on dissolution of a partnership without a written agreement, any assets will be sold, and the proceeds used to pay off any partnership debts. If a deed is not in place, the partnership may need to be formally dissolved in the event of a dispute. You may also face difficulties and more than likely court action to get rid of a disruptive partner.

What if it is a 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.

For expert advice on all aspects of corporate commercial law, contact Backhouse Solicitors today to book a free initial consultation:

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