Posted Wednesday 8th October 2014

She'll be right...

Why have a shareholder agreement?

Part of the success of many businesses is the legal framework that forms the structure and backbone of the business.  Agreements between the owners of a business are a key part of this framework and are used to  set expectations at the commencement of the relationship, provide a set of rules for the parties' during the course of the business relationship and determine the outcome where an owner wishes to exit the business or the parties become involved in a dispute.

Depending on the type of entity that the business trades from, this type of agreement may include:

  • a shareholders agreement, when it is between two or more shareholders in a business;
  • a partnership agreement, where it is between two or more individuals, trusts or companies; or
  • unitholders agreement, where it is between two or more unitholders in a unit trust.

Once a business is commenced in partnership, it can be like a marriage in the sense that things are usually cordial in the early days ('honeymoon period') and while the business is making money.  However, over time the parties can begin to move in different directions and personal disagreements may arise between them, at which time it can be very expensive and stressful for the parties to resolve their issues. 

A set of "rules" for your relationship

A good partnership agreement can prevent this from destroying the business by clearly identifying matters such as the following:

  • the extent of each partner's control and ownership of the business;
  • ensuring that appropriate restrictions are put in place regarding a party's transfer of its interest in the business to a third party;
  • identifying each party's required contribution to the business;
  • the arrangements for the exit or retirement of a partner are identified;
  • arrangements for the future funding of the business;
  • potential future events, such as the anticipated sale of the business to a third party are taken into account; and
  • any disputes between the parties can be resolved without recourse to expensive court litigation.

Initiating a partnership or shareholder arrangement can occur in a variety of ways, from two or more partners seeking to commence business in partnership to business owners offering key employees a share of an existing business to ensure their loyalty and provide an incentive for growth.  We have significant experience in negotiating such agreements and know what may be important to each party in entering into negotiations to form a partnership.  This understanding is crucial to ensure that negotiations can be concluded satisfactorily and long term arrangements put in place to benefit the business.

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