Safeguarding your Business Partnership

Peter Lynn and Partners , 2nd October 2023

Written by:

Rob Cherry

Consultant

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Hindsight is truly a wonderful thing.

The clarity of knowing what you should have done can cause frustration like no other. Add in a few “I told you so” comments, a hefty financial bill and you can be sure you will not forget the lesson learned in a hurry.

For those who have been through a business breakup, especially where there isn’t an agreement in place, you will know only too well the need to have a written partnership or shareholder agreement, no matter how strong the relationship is to begin with.

In fact, it could be argued that it is even more important where you are going into business (or already in business) with friends or family as there is potentially more to lose than just your business relationship if it goes wrong.

Building a business inevitably involves intense, stressful situations, problems arising and decisions required and even perfectly sensible disagreements on how to deal with these can have a severe detrimental impact on the business.

Many businesses are formed on a handshake and whilst there is no legal requirement to have a formal agreement in place, if a disagreement arises, it could be the most important document you have.

Consider the following common disagreements between business partners:

One partner is taking a lot of holidays and not “pulling their weight” yet still wants an equal share of profits
There is a difference of opinion on investment in the business
A shareholder wants to lease expensive vehicles for himself and family members
A director wants to take out a loan from the business
A partner wants to give a high paid job to his family member who is not suitable for the role
A partner wants to retire or leave the business
A partner dies or becomes seriously ill

These are just a handful of scenarios that are often the catalyst to a disagreement that can sometimes end up in court if there are no clear guidelines in place on how to deal with specific situations.

So what can you do?

Having a shareholder agreement offers security and clarity at the very time you need it, yet so many businesses are leaving themselves exposed by not having one in place.

What is a shareholder agreement and what does it do?

A shareholder agreement:

Sets out the rights and obligations of each shareholder to each other.
Provides rights to have a seat on the company’s board.
Regulates any transfer of shares through sale, death or other means – usually providing rights of pre-emption for the other shareholders.
For “owner-managed” companies, it provides an obligation to offer your shares to the others involved in the business if you decide to leave the company.
Sets out rules of how the company is going to run and what dividends will be paid.
Offers protection to shareholders who are in the minority, requiring special majority consent for major decisions.
Provides obligations of confidentiality regarding commercially sensitive information and “non-compete” covenants for a period after someone leaves the business.
Provides rights for minority interest to join in any sale of the business and not get “left behind” on a sale of a majority interest. Also ensures a minority interest cannot prevent a sale where the buyer wishes to acquire 100% (so-called “tag” and “drag” rights).
For 50:50 partnership businesses, provides a mechanism for resolving an irreconcilable falling out regarding the business.

What if you already have a shareholder agreement in place?

If you have an agreement, check that it is up to date and that you have amended it as your business (and its ownership) has changed. Ultimately, you need to ask yourself “Does it reflect your current business and its current ownership and management structure?”

If not, arrange a review with an experienced company and commercial law firm.

A review will not only ensure your business is protected but we’ll work with you to identify areas where you may be legally unprotected.

What to do if you do not have an agreement in place?

If you do not have any written agreements in place, arrange a meeting with a reputable law firm as soon as you can. A good law firm will be able to quickly assess your business structure and help with agreements such as: