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Shareholder and Partnership Agreements – what are they and when are they a good idea?

Shareholder and Partnership Agreements – what are they and when are they a good idea?

(SPOILER: they’re always a good idea!)

Shareholders Agreements

A limited company is a separate legal entity and, therefore, exists in its own right. A shareholders’ agreement is simply a contract between fellow shareholders.  It can regulate the rights and duties of the shareholders and can govern the affairs of the company.  We would suggest that every company (where there is more than one shareholder) should have a shareholders’ agreement, or substantial articles setting out agreement of important issues (such as exit terms, death, divorce, disagreement etc).  The best time to agree these things is when you are all getting on, not when there is a dispute brewing!

Below are a few key indicators to look out for when considering whether a shareholders’ agreement would be appropriate: –

  • Is there a limited company? If a business is not a limited company then a shareholders’ agreement is not appropriate. There are alternative arrangements that can be implemented (such as a partnership agreement for a partnership arrangement)
  • Is there more than one shareholder? Whilst it may seem obvious, a shareholders’ agreement is only appropriate where there is more than one shareholder.
  • Are you a minority/majority shareholder? A shareholders’ agreement could be of particular importance where there are differing levels of control. It is often beneficial for all majority and minority shareholders to understand exactly what will happen should an exit option for any such shareholders become necessary, dealing with changes to the Company’s ownership structure in a much more streamlined manner.
  • Is there a shareholders’ agreement in place already – can a copy be obtained? Often there can be older (potentially no longer relevant) shareholders’ agreements in place already. As shareholders’ agreements are not public documents, it is not always clear whether there is an agreement in place. It can be useful to ensure appropriate people are informed of its existence such as directors and/or executors where relevant.
  • Is there an insurance policy in place to cover a transfer of shares in the event of death/incapacity? Provision can be included to deal with the necessary legal procedures to implement the changes required to process the transfer of shares when an insurance policy is claimed against.
  • Is it your intention to reduce their level of involvement in a company whilst protecting its value/keeping a level of control?
  • Is there an intention for the Company to be sold? If so, the process can be streamlined by including obligations for all minority shareholders to also sell their shares on the same terms. Similarly, there can be an option included for minority shareholders to be entitled to sell their shares should the majority shareholder(s) agree a sale.

The ‘default position’ should there not be a shareholders agreement in place is that any issues a company faces will need to be dealt with in accordance with its Articles of Association (often which do not deal with the necessary issues) and the Companies Act 2006. It can often be a much more prolonged and expensive process when relying on the ‘default position’ than using more relevant and therefore efficient processes determined through a well structured shareholders agreement.

Partnership Agreements

  • A partnership is a relationship between parties carrying on a business in common with a view to make a profit. The relationship is governed by the agreement between those parties. The agreement can expressed or implied, written or unwritten.
  • The contractual agreement is not the essence of a partnership, as it is a continuing personal as well as commercial relationship – governed by the Partnership Act 1890.

Key Indicators

  • Does the client have a business with others that is not a limited company;
  • On what grounds does the partnership operate: under a written agreement or otherwise? (a ‘handshake’ being a common one!);
  • If there is a written agreement and when was this last reviewed; and
  • Does the client know if the written agreement includes provision to accommodate the death/incapacity of a partner?

The Partnership Act 1860 is cumbersome and unsuited to modern commercial relationships in most instances.  Reliance on it can cause numerous issues. For example, the death of a partner, under the Partnership Act, triggers the automatic dissolution of a partnership. This includes the realisation of its assets and the payment of all its liabilities, and does not allow for continuing the business. Additionally, a partner can give notice to dissolve a partnership with immediate effect at any time (under section 26). Both examples can easily fall out of the control of partners who wish to continue business despite the above scenarios and could otherwise be dealt with in the form of a well drafted partnership agreement.  It also means that an exiting partner can hold the continuing partners to ransom, which is less than ideal. 

Conclusion

A properly drafted shareholders’ agreement or partnership agreement can make otherwise stressful times much easier and, almost always, results in saved costs in the long-term.

It is imperative that your exact business needs are considered however – there is no such thing as a standard shareholders’ agreement or partnership agreement, so you will need to take individual legal advice before putting one in place.

For an initial discussion or for further advice, please get in touch with Wards’ Head of Corporate Commercial, Marina Maclennan at marina.maclennan@wards.uk.com, or Solicitor Ciaran Keane at ciaran.keane@wards.uk.com.

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