The importance if a well drafted shareholder or partnership agreement in any business cannot be underestimated. It will provide clarity for all concerned and help avoid potentially damaging and expensive disputes if the shareholders or partners later fall out. Our expert team can provide the bespoke agreement your business needs. Let us help get your business on a sound legal footing.
A well drafted a shareholders or partnership agreement is always recommended in any business. Setting out the rules which govern the business owners helps provide certainty between those individuals – and a mechanism to resolve any differences if things become personal.
- for new businesses, whether it be a family run business or a business idea created between friends, ensuring your business relationship (as opposed to your personal relationship) remains consistent and is not at risk of any changes is hugely beneficial.
- equally, for more established businesses, such as family-run firms (whether large or small) there is often a generational change that can have an impact on how the business is run. A properly drafted agreement can ensure that any generational changes of ownership are dealt with in a fair and understandable way, avoiding the potential for family conflict.
For partners, a partnership agreement comprises the default constitution within which the business is run, and this agreement can be drafted to reflect the specific terms of partners. If after a period of time this needs to change, then the partners can renew the partnership agreement with the consent of members.
For a company, the constitution is normally set by statute and its articles of association. A more bespoke tailored shareholders agreement is optional but always recommended. In the absence of any such agreement, there remain a number of risks that shareholders face, particularly those who are new to a company or whom have a lower level of control of its affairs. A shareholders agreement is particularly useful to protect the interests of Minority Shareholders.
What happens if there is no shareholder agreement?
Without a shareholders agreement a company will be run in accordance with its constitution (the company’s articles of association) and directors and the company will only otherwise be restricted by legal obligations, most of which exist under the Companies Act 2006 and associated legislation (which contains restrictions on what directors are permitted to do).
- unless the articles of association have been amended, there is no structural or other document which aligns the company’s business with the original intentions of the owner / managers as a group;
- this becomes particularly important in circumstances where there are disputes between the owner / managers and uncertainty as to how such disputes are settled.
Differences with a partnership agreement
Partnership businesses are generally more flexible – there is not as much of a distinction between the owners and the managers (which is why small companies run by the same people who own it are often referred to as “Quasi Partnerships”).
Accounts are generally produced more quickly, taxation is generally a personal matter – which is useful where an individual wants the benefit of limited liability status whilst also wanting to account for their own tax affairs (rather than the company paying tax on its profit) – and there is an automatic right to a share in profits.
The equivalent for a company, dividends, are not an automatic right granted to shareholders (although a shareholders agreement could make provision for this, dependant on circumstances).
The risks attached to these benefits are numerous.
- designated members of a partnership, being those partners who run the business, are not subject to the same duties as directors;
- additionally, a partnership agreement will often excuse any members from being at risk of an unfair prejudice claim (as partnership regulations permit a carve out of any such rights, by other members, in the event any partner running the business acts to damage another partner’s interest).
Contents of a partnership agreement an shareholders agreement
A shareholders agreement is a private agreement between shareholders as to how a company is run and will usually exist alongside the company’s articles of association. The company will be bound by it and it is not required to be filed at Companies House and accordingly enables more “business-driven” objectives to be put down in writing, which would normally not be disclosed to the public at large.
A partnership agreement is also private to the parties and is not as constrained by some of the statutory restrictions applicable to companies, whilst also being able to reflect the rights and interests bespoke to its partners (in a similar way to a shareholders agreement).
Both agreements will address issues as to
- how the business is run;
- roles & responsibilities;
- corporate governance issues;
- profit shares and interests;
- remuneration; and
- how disputes are resolved.
Most particular amongst these issues may be the following (which is not an exhaustive list, on the basis that each business has its own needs):
- corporate governance and how the business is managed;
- how profits are distributed and remuneration;
- dispute resolution between members;
- providing for new entrants;
- providing for an exit or business sale;
- providing for business valuation.
One of the most common parts of a shareholders and partnership agreement is to manage exit arrangements and any potential fall-out from a partner, director, shareholder upon exit.
A well drafted agreement should ensure that future problems are avoided, disputes between shareholders and directors (or between them) are easily and quickly settled with certainty and, should it be required, it will properly set out the procedure to deal with disputes.
At Francis Wilks & Jones we cannot manage all risks that you and your business may face, but we are very experienced in the most common problems arising, how to protect against them and how to resolve them before matters escalate to court proceedings or business failure.
“Supportive and friendly with partner-led involvement, I would recommend Francis Wilks & Jones to anyone facing a similar situation.”
A shareholder who turned to us after discovering that his co-shareholder was profiting well from their business while he was being paid a pittance. We helped him find a way out of the business by selling his shares