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Put it in writing!

03 Jun 2011

When two or more people are in business together, whether in partnership or in a limited company, the terms on which they own and run the business should be set out in a partnership or shareholders’ agreement. In far too many cases, the lack of an agreement causes serious problems for the parties (or their nearest and dearest) when something goes wrong.

Most business partners trust each other to behave reasonably, but the fact has to be faced that partners do sometimes fall out. When that happens, having a legal contract is invaluable. It provides guidance on each of the parties’ rights and duties, and prevents the dispute resulting in protracted, expensive and often very bitter litigation. As in a personal partnership, when a business partnership breaks up, the dispute can easily become acrimonious.

Apart from the partners falling out, problems can arise if circumstances change, for example if one of them dies, falls ill, has an accident, or even experiences a mid-life crisis.

There are some major differences between partnership agreements and shareholders’ agreements, and the terminology is significantly different, but the terms such agreements have in common typically include:

  • who owns the business and in what proportions;
  • the partners’ profit shares;
  • taking money out of the business;
  • the admission of new partners (or directors/shareholders);
  • what happens if someone falls ill or has an accident;
  • what happens if someone wants to leave the business;
  • what happens to the share of a partner who dies.

The lack of a partnership or shareholders’ agreement should be a matter of serious concern to anyone involved in a business with other people. When people get together to start a new business, money is understandably tight, and so the preparation of one of these documents is often postponed.

After a few years, when the business is reasonably successful, they may never have gotten round to formalising the arrangement between them. After all, it has all worked well enough so far… but the reality is that the business is now a valuable asset. As time goes by, people and their expectations change, as does the nature of the business and the economic circumstances in which it operates. Their lack of an agreement leaves them without solutions to the problems that can arise.

The following are just a few of the many situations where the lack of a partnership or shareholders’ agreement can cause real problems:

  • Three people are in partnership and one of them dies unexpectedly, leaving all her property to her two children. In the absence of a partnership agreement, either of the children can insist on the whole business being sold so that he can get his share of his late mother’s assets.
  • Four people are shareholders in a limited company. They get a very attractive offer to sell the business but one of them refuses to do so. The sale cannot go through.
  • Three people are in business as equal shareholders and directors of a company. Two of them want to bring in a fourth person, making her a director and issuing shares to her. Depending on the provision in the company’s articles, they may be able to do this by a majority decision against the wishes of the third.
  • Four people are in partnership. One of them decides he wants to leave the firm, taking his share of its value, even if that means selling the business. In the absence of a partnership agreement, he has that right, without having to give any period of notice, and without the others having a right to buy him out over a period of time.

Quite apart from being valuable if something unexpected arises, the process of drawing up an agreement will require the partners to discuss and agree between them what provisions they want in their agreement in the above, and many other, situations.

The company commercial team at Hay & Kilner will be happy to assist with any queries you may have.

Please note: This article is not legal advice; it is intended to provide information of general interest about current legal issues. Please contact us to discuss how the contents of the article may affect you.