I was recently asked to give advice to the client in relation to a partnership agreement that they had signed in their business. The agreement had been purchased online and my client had basically “filled in the blanks”.
My client is now a 50% owner in the business but because of the terms of the agreement that was signed, my client has no say at all in the management and operation of the business. This news was distressing for my client, especially given the business relationship is deteriorating.
This type of situation could easily have been avoided by the parties seeking advice and properly documenting an agreement that actually reflected the arrangement between the parties. A properly drafted agreement can serve to avoid unnecessary disputes arising throughout the term of a business relationship.
A shareholder or partnership agreement should address a number of issues, including:
- The correct legal entity of each owner;
- The principal of each owner, if the owner is a company or a trust;
- The percentage of the business owned by each owner;
- Whether any other agreements are contingent on the shareholder/partnership agreement (such as buy/sell agreements, employment agreements, loan agreements);
- The capital to be injected by each owner into the business;
- What happens if further capital is required;
- The ownership of key assets in the business such as intellectual property etc;
- Any prerequisites for being an owner of the business (such as a professional qualification);
- If the business is a company, the minimum and maximum number of directors;
- Representation on the board;
- The percentage of ownership required for certain resolutions to be passed;
- The role that each principal plays in the business;
- Any restraint on the owner upon leaving the business;
- Profit distribution policy;
- How a party can exit the ownership of the business (i.e. do they have to first offer their share in the business to the other owners);
- What happens upon the death, total and permanent disability or trauma of a principal;
- Can an owner be expelled from the business;
- How is the business valued upon the exit of an owner;
- What happens if a dispute arises.
I also have found from experience that addressing these issues at the commencement a business relationship allows the parties to address some difficult topics before they commence the business relationship. I have had occasions where clients have decided not to go into business with another person as a result of negotiations for the shareholder agreement.
If you have any questions in relation to this important document please do not hesitate to contact me.