Gardner Leader

Shareholder/partnership agreements

Most people start out in business with people that they get on with, who have a similar approach and share their business objectives. In the early days everyone is happy and focussed on doing what they are good at – making and selling the product or providing the service.

In those early days, a shareholder agreement or a partnership agreement might seem an unnecessary expense – you know what you want to do and any problems can be sorted out as they arise.

As time goes on, however, people change and so do their ideas about how a business should be run. This can lead to friction and disputes. It is then that you may regret not having some kind of agreement in place to regulate how the business is to be run. When relationships do break down, it is too late to try and put an agreement in place. It needs to be done when everyone is of one mind and wants the business to run smoothly.

In the absence of an agreement, you have to fall back on the Companies Act or the Partnership Act and this may have consequences which are as unwelcome as they are unexpected.

A properly drafted agreement can lay down some ground rules to set limits on how much each party can spend on behalf of the business without consulting the others, and what sort of commitments need the approval of all the parties. It can list various major decisions which can only be taken by a unanimous vote or specify particular majorities which are required.

Partnership agreements can set out clearly how the profits are to be divided, what property is owned by the partnership and what remains the property of the individual partners and how the capital of the partnership will be divided when the partnership comes to an end. An agreement can ensure that there is an orderly procedure in place if a partner retires or dies, and can specify circumstances in which a partner can be expelled

Shareholders agreements similarly can lay down a dividend policy and put in place mechanisms for controlling the transfer of shares. Procedures can be put in place for dealing with disputes.

A shareholder or partnership agreement can be as long or as short as you want it to be and need not be full of legalese. It is all about ensuring that all parties understand and accept the framework within which they will be working. The drafting process itself can often be useful in highlighting differences of opinion between the parties so that these can be resolved before they become a source of friction.

If you are lucky, once you have signed your agreement you might put it in a drawer and never have to look at it again. Having an agreement will not necessarily prevent disputes arising and may not always provide an easy answer, but it will at least provide a common starting point and a much better chance of both avoiding and resolving disputes.

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