You are probably reading this guide because you are at the beginning of your business venture however it could be because a partnership or shareholding has gone wrong. This guide is all about helping you get that first shareholder & partnership agreement right so down the track there is a clear predetermined plan of how things should happen.
A Shareholder & Partnership Agreement is a legally binding contract between the shareholders or partners of a business. A Shareholder & Partnership Agreement covers the funding, structure, management and direction of the business. It outlines the responsibilities and obligations of the business owners.
WHY should all partners be in agreement?
In the excitement of starting a new venture, it is very easy to put this important task aside. A shareholder agreement is to protect the multiple owners’ investment in the business, to establish a fair relationship between the owners and govern how the company is run.
It is best to put a shareholder and partnership agreement in place when the business is first established. At this early stage owners should be like-minded and if this is not the case questions should be asked why you are going into business together.
WHAT is in a shareholder & partnership agreement?
The agreement should contain important, specific, and practical rules relating to the business and the relationship between the owners.
The agreement should (but not have to) include:
- define who are the shareholders, in what percentage ownership over what term
- define how important decisions are to be made
- describe how the business is going to be run
- indicate if any intellectual property is not owned by the business
- set out the owners’ rights and obligations including time spent on business
- agreement on accounting processes and reporting
- decide how profits will be divided and income paid
- regulate the sale of shares in the business including full sale and withdrawal or addition of an owner
- define dispute resolution procedures – if 2 owners have equal decision making decide how will you break the stalemate
- outline any additional powers of minority shareholder/s so not always overruled on key decisions
- define what constitutes a breach of the agreement and what action should then take place – possibilities include termination or mediation
- include restrictions to stop shareholders from starting a new business in competition
- identify how an owner may exit the business
- have terms around specific circumstances like:
- Hiring and firing of employees
- Who can authorise payments
- Taking on debt
- Approving expenses
If a disagreement does occur in the life of the business and there is a clear shareholder agreement it gives a clear roadmap to move forward.
A partnership or shareholders agreement can be drawn up by a lawyer and you will find several providers offer a template-based solution that can be adapted to your specific needs via the internet for minimal cost.
HOW do you deal with conflict?
Conflict will inevitably arise with shareholders at some point in the running of a business. It does not matter how well you know your fellow owners, irrespective if they are a family, friend, or business partner it is best to have a shareholders agreement in place that you can refer to when conflict arises in your business relationship.
A lot of successful small businesses have been known to have shareholders with stormy relationships. A business relationship, whether good or bad, can have a huge impact on whether a company is going to be successful or not.
Decisions should be made through discussion, compromise and ultimately deciding what is best for the business. More progress can be made on working out how to resolve conflict rather than how to win a conflict.
Being a minority shareholder and having a shareholders’ agreement that includes the requirement for all shareholders to be unanimous ensures that you have a say in the important decisions that impact the company. This could be decisions on:
- Adding or removing owners
- appointment or removal of staff
- taking on new debt
- changing business operations
However, if all decisions must be unanimous this could cause problems and ultimately prevent your company from carrying out its business.
In a scenario when two owners each own 50% each of the business it is important to have a dispute resolution provision included. Without an agreed procedure to resolve disputes no decisions can be made leaving the company unable to operate.
You can terminate a shareholder agreement in one of 3 ways:
- By mutual agreement – the original shareholder agreement should have had a provision on this
- Termination by a breach – unless there are clauses for mediation of a breach in the agreement can lead to termination
- One owner withdraws – the shareholder agreement should have a provision that maps out this scenario
To force an unhappy shareholder to stay in a business may cause more problems than having a new shareholder who is interested in the business being successful. Shareholders’ agreements will often include rules around share sales and transfers – who shares can be transferred to, on what terms and at what price.
Decisions can be specified to be based on equity holdings or unanimous by all owners.
Discussing the worst possible scenarios at the beginning of your business journey and having a roadmap to resolve them will save a lot of headache down the track. The more comprehensive the better.
Owners need to enter into an agreement voluntarily.
Any new shareholder must be bound by the terms of the original shareholder/partner agreement.
SUMMARY – shareholder & partnership agreement for profit
A shareholder or partner agreement is a legal document that creates a set of rules for the owners to follow when a business is first established. It helps deal with certain scenarios that may occur in the future to reduce the chance of conflict. Those rules deal with equity, decisions, obligations and the ultimate end of the agreement. A well legally written agreement can be produced inexpensively from templates or through a lawyer.