Shareholder and Partnership Agreements – what are they and when are they a good idea?
(SPOILER: they’re always a good idea!)
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: –
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.
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.
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 email@example.com, or Solicitor Ciaran Keane at firstname.lastname@example.org.