Why do I need a Shareholders’ Agreement (Partnership Agreement)?

Anyone who is a co-owner in a business should have a Shareholders’ Agreement (if the business is carried on by a company) or a Partnership Agreement. These Agreements minimize the likelihood of a dispute by ensuring that the co-owners have considered the objects of the business and their individual roles, rights and responsibilities. Disputes between co-owners who have not entered into a shareholders’ Agreement are more common as there has generally not been any prior consideration or discussion of the co-owners’ respective commitment to the business or restrictions on dealing with their interest in the business.

Most people that enter into business together are confident that they can maintain an amicable relationship when running the business, however, where the relationship can not be maintained, co-owners who have not made a Shareholders’ Agreement stand to lose considerably more. Disputes in relation to the following are more likely to have a crippling effect on you and/or your business in the absence of a Shareholders’ Agreement:

  • The direction and growth of the business;
  • The appointment or removal of a person as a Director;
  • The level and minimum duration of each co-owners’ commitment of time and financial resources;
  • The denial of a co-owner to relevant information and/or exclusion from decision making;
  • The payment of dividends vs the retaining of profits for future growth;
  • The issue of new shares to new investors/co-owners;
  • The sale of a Shareholder’s Shares to an unsuitable third party or without first offering the Shares to the other Shareholders;
  • The sabotage by a co-owner of a proposed take-over or merger;
  • The right to buy back the Shares of a co-owner who is no longer fulfilling their contribution to the business as originally contemplated;
  • The valuation of the Shares of an outgoing co-owner;
  • The carrying on of a similar business by a former Shareholder in competition with the business.

The time and cost alone of dealing with any of the above disputes can lead to the financial ruin of a business and total loss of value of a co-owner’s equity.

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By Sam Roberts,
Managing Director, Accredited Specialist (Commercial Litigation)