Shareholder and Partnership Agreements

The importance of Shareholder and Partnership Agreements

When diving into the deep world of Shareholder and Partnership Agreements, it is important to have a well drafted document in place and here's why.

Times have changed with the structure of partnerships and agreements not being all the same, and therefore, not catering for a one-size-fits-all approach.

Business generally starts as a lone idea, or one that is discovered between friends or colleagues.  As the idea grows, and a plan formulates, the collaboration between the parties develops into a business venture. Richard Branson says that “You can’t do a good business with a bad person.  Find the right people to work with and you can’t go wrong”.  While insightful, there is always the potential for something to go wrong in business if everyone is not on the same page.  Once light hearted and enjoying the process, can turn bad in an instant if there is a disagreement on process or conduct, or a decision needs to be made.

This is where the importance of a well structured agreement comes into play.  Whether you are two, or more, friends, or a shareholder in a company, the importance of a well drafted agreement should never be overlooked.  A well drafted agreement should provide clear terms, provide clear resolutions and manage the parties.

Although partnerships and shareholders differ, their agreements and purpose, are similar. There is no legal obligation to have a Partnership Agreement, however, if partners don’t have an agreement and there is a dispute, a decision may be made by the court.  The agreements are contracts made between the parties incorporating the rights, obligations and liabilities of each party and should be made with clear, valid and enforceable intentions agreed by all parties.

Partnership Agreements

A Partnership Agreement should include the details of the Partnership including the name of each of the partners, contributions by each of the partners and details of how the profits and losses will be distributed, voting rights, non-compete stipulations and how the partnership will be dissolved.  The Partnership Agreement will also include who will manage the day-to-day business of the partnership and who will maintain responsibility for signing company cheques, recruitment of employees and who will be responsible for assuming new expenses and debts over a specified amount.

Without the above specifications, unless otherwise stated within the Agreement, under Queensland legislation, partners would have equal authority, would be entitled to equal shares of the businesses profits, no partner would be able to be expelled from the partnership and there would be an automatic dissolution of the entire partnership should one of the partners retire.

Provisions to consider when drafting a Partnership Agreement:

• Name and address of the business and its purpose, and of the partners
• Duties and responsibilities
• Decision making processes
• Monetary contribution of each partner
• Profit and loss distribution
• Partner income
• Tax and stamp duty issues
• Dissolution of the partnership

Shareholder Agreements

A Shareholder Agreement on the other hand, is essential to govern the relationship between the parties during the agreement and after it ends. The Shareholder Agreement should incorporate provisions, that in the event of inconsistency between the Agreement and the Constitution, the Agreement will prevail. A company constitution incorporates general rules for the governance of a company in its entirety, whereas a shareholders’ agreement regulates powers, rights and responsibilities of the actual shareholders.

It is advisable that disputes are resolved through alternative dispute resolution to prevent costly and lengthy litigation. In the event that shareholders are unable to agree on the management of a company, there should be provisions in this agreement outlining how to deal with situations when there is a deadlock between the parties. 

Failure to have a Shareholder Agreement in place can lead to a myriad of issues from the sale of the business being blocked by a minority shareholder to a shareholder gaining an extensive understanding about the business and then leaving to set up a competing company and poaching your existing customers or staff.

Provisions to consider when drafting a Shareholder Agreement:

• Share types and division
• Shareholder rights
• Dividend division
• Voting rights
• Shareholder consent to specific actions
• Process when voting is deadlocked
• Transfer of shares
• Allocation of new shares
• Valuation of shares
• Shareholder liability

All partners and shareholders should seek independent legal advice before entering into a Partnership or Shareholder Agreement.  If you would like more information in relation to Partnership or Shareholder Agreements please do not hesitate to contact us on (07) 4963 2000 or via our online form.