Shareholder and partnership agreements

Why do you need a shareholder or partnership agreement?

When business owners work well together, it can be tempting to rely on informal arrangements. However, disagreements can arise over money, responsibilities, strategy or the future direction of the business. Without a suitable agreement, resolving these issues may become complicated, expensive and disruptive.

A shareholder agreement or partnership agreement can set out the rights and responsibilities of the people involved, helping everyone understand the arrangements from the outset.

Depending on your business and its structure, an agreement may cover:

Roles and responsibilities: Clarifying the contribution expected from each owner and how the business will be managed.

Decision-making: Establishing which decisions require a majority, a particular shareholder’s consent or unanimous agreement.

Profit and dividend arrangements: Setting out how profits may be distributed, subject to the business’s structure and applicable legal requirements.

Selling or transferring an interest: Establishing what happens if an owner wants to leave, sell their shares or transfer their interest to someone else.

Dispute resolution: Providing a framework for dealing with disagreements before they threaten the future of the business.

Confidentiality and restrictions: Considering appropriate protections for confidential information and, where suitable and enforceable, restrictions on competing activities.

The right provisions will depend on the business, the people involved and the risks you need to manage.

Shareholder agreements and partnership agreements: what is the difference?

A shareholder agreement is generally used by a company with two or more shareholders. It can regulate the relationship between shareholders, set out how certain decisions are made and provide agreed procedures for transfers, exits and disputes.

A partnership agreement is used to govern the relationship between business partners. It can address matters such as capital contributions, profit sharing, management responsibilities, the admission of new partners and the departure or retirement of an existing partner.

The appropriate document depends on how your business is structured. A limited company, traditional partnership and limited liability partnership (LLP) have different legal frameworks, so it is important to ensure the agreement reflects the correct structure.

How does a shareholders’ agreement differ from the Articles of Association?

A company’s Articles of Association are its constitutional rules. They deal with matters such as the company’s internal administration and the rights attached to shares.

A shareholders’ agreement is a separate agreement between some or all of the shareholders and, sometimes, the company itself. It can address matters in greater detail, including decision-making arrangements, confidentiality, share transfers and what happens when a shareholder wants to leave.

The two documents should work together. An agreement should be drafted with the company’s Articles and wider legal obligations in mind, rather than treating them as interchangeable.

Planning for deadlock, disputes and business exits

One of the most important reasons to put an agreement in place is to decide what happens when the owners cannot agree.

A deadlock can arise when shareholders or partners have equal voting power but take opposing views on an important decision. Without a clear procedure, the business may struggle to operate effectively. Depending on the circumstances, a deadlock clause could establish a process involving negotiation, mediation or another agreed mechanism.

An agreement can also set out how an owner’s interest will be valued and transferred when they leave. The method of valuation, the circumstances in which an exit can take place and any payment arrangements should be considered carefully.

Some companies may also benefit from tag-along and drag-along provisions. Broadly, tag-along rights can give minority shareholders the opportunity to sell their shares on equivalent terms when a qualifying sale takes place. Drag-along rights can, where the agreed conditions are met, enable a qualifying majority to require other shareholders to participate in a sale. These provisions need to be tailored to the company’s circumstances and existing constitutional documents.

Restrictions on competition or solicitation may also be relevant, but their suitability and enforceability depend on their wording and the circumstances.

When should you put an agreement in place?

It is usually sensible to consider an agreement when a business is being established or before a new shareholder or partner joins. It may also be appropriate when ownership changes, investment is introduced, responsibilities are revised or an existing agreement no longer reflects how the business operates.

Even if your business has been running for years without a formal agreement, it is worth reviewing whether the current arrangements adequately protect everyone involved.