Contingency plans are a must in business. Plan for the best but always be prepared with an action plan in case of the worst. A shareholder and/or partnership agreement is what protects you in the event that things don’t work out with partners or shareholders.
Both the shareholder and partnership agreement address any issues related to the management, financing and operation of the company. They often include provisions dealing with transferring shares if a partner or shareholder wants to sell their interest in the company.
The rights and responsibilities of each party are clearly defined. The goal of the agreement is to create a system for preventing and solving problems that can come up over time. It is important to determine how decisions will be made and what happens if you can’t reach an agreement.
In the absence of an agreement, the law dictates how to run your company / partnership. Given that the law can be complicated, which aggravates an already difficult situation to have default laws governing your partnership and issues. Drafting an agreement that clearly defines all relevant elements allows you to avoid expensive and disruptive litigation down the road.
Common provisions of a Shareholders Agreement
As with any agreement, you can determine the level of detail that is required based on your particular circumstances. For example, an agreement for two best friends starting a business would be very different than one involving a global entity.
Here are the most common provisions in a Shareholder or Partner Agreement:
Ownership: It’s important to define who owns what percent of the business.
Control: Who is responsible for the day-to-day operations, and who makes larger, more sensitive decisions.
Disputes: It’s a reality that disputes will arise. Typically they are resolved internally and amicably. However, if there is an issue that can’t be resolved, it is important to have an agreed upon understanding of how disputes will be resolved. If the company dissolves as a result of the situation, the agreement would contain details on how to distribute the assets.
Payment of dividends: There are three options for handling profits – you can reinvest in the company for growth, pay off debts or declare a dividend to pay out to the shareholders. Documenting the agreed upon option will help avoid disputes.
Shareholders: Typically the agreement would outline the policy and procedure for new shareholders joining and existing shareholders leaving. To avoid disputes over the price of shares, the agreement will usually define how the shares should be valued.
While the agreement offers protection, there is also value in the discussions leading up to the drafting of the agreement. It’s a chance to learn where you and your partners stand on the issues and get a feel for how you will work together.
Our business lawyers have experience advising business owners and drafting partnership and shareholder agreements. The investment in an agreement will save you headaches and money down the road. Contact us to learn more about how we can help you today.
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