I was recently instructed by a client, who had a problem with her business partner.
The problem was a complicated and extremely fundamental issue and I asked her if she had any written agreement such as a shareholder’s agreement or a partnership agreement and she said she did not. She said she did not believe there was any legal obligation to have such a written agreement and I accepted that there was not.
However, I said that if there was no written agreement in place then it was open to both sides to give an entirely different version of whatever understanding they had concerning the particular issue that was causing such difficulty. In a fact it would mean that the entire business would have to close down unless the partners were able to resolve the outstanding issue.
Here is a list of some useful questions and answers you should think about when setting up any business.
1. When is the best time to complete a shareholder’s agreement or a partnership agreement?
This should be at the very outset when everybody is enthusiastic and in agreement. Do not wait for a problem to arise and then deal with it. Prevention is the best cure.
2. How can I remove a director/partner or bring somebody new into the business?
All of this can be covered in the shareholder’s/partnership agreement. The agreement should clearly spell out the circumstances where somebody can be removed as a director or a shareholder or a partner. These clauses have to be fair and reasonable and should be carefully drafted but they can and should be drafted from the outset.
3. How often do partners and directors need to meet?
There is no set rule but meetings should be regular and the agreement should set out a minimum number of people, who should attend such meetings.
4. How do we divide profits?
Again, this is a matter for discussion and agreement and it is best arrived at in the very early stages. Nobody can tell how the future will proceed so there should be provision to have the matter reviewed on a regular basis. Profits can be divided depending on the amount of shares one owns in the company or the business or it can be determined by some other method – whatever fair method is agreed.
5. Can a partner or shareholder or director have an outside interest?
Yes, they can but provision should be made that they will devote their entire attention to the business and if they have another business then they should reveal this to their colleagues, who should approve in order to ensure that it does not interfere with the smooth running of their own business.
6. What happens if a partner/director becomes seriously ill, incapable or dies?
Again this is something that can be spelt out in an agreement. Generally speaking if no provision is made then person’s assets pass under the terms of their will or on the rules of intestacy. Sometimes this can cause enormous inconvenience and upset and it may be better to insert clauses in an agreement to cover such an eventuality. Pre-emption clauses are often used, which means that if a person is sick for a considerable period of time or dies then the remaining shareholder or partners can acquire their shareholding for a fair price.
7. How do you resolve disputes?
This is critical. The partnership agreement should spell out specific steps the partners have to take in the event of a dispute. Litigation should be a last resort so it is worthwhile spending some time agreeing an alternative dispute resolution, which will keep expense and upset to a minimum in the event of a dispute and hopefully improve the chances of an amicable resolution.
The bottom line here is that if you are involved in any business whatsoever with another person, PUT IT IN WRITING.
The problem was a complicated and extremely fundamental issue and I asked her if she had any written agreement such as a shareholder’s agreement or a partnership agreement and she said she did not. She said she did not believe there was any legal obligation to have such a written agreement and I accepted that there was not.
However, I said that if there was no written agreement in place then it was open to both sides to give an entirely different version of whatever understanding they had concerning the particular issue that was causing such difficulty. In a fact it would mean that the entire business would have to close down unless the partners were able to resolve the outstanding issue.
Here is a list of some useful questions and answers you should think about when setting up any business.
1. When is the best time to complete a shareholder’s agreement or a partnership agreement?
This should be at the very outset when everybody is enthusiastic and in agreement. Do not wait for a problem to arise and then deal with it. Prevention is the best cure.
2. How can I remove a director/partner or bring somebody new into the business?
All of this can be covered in the shareholder’s/partnership agreement. The agreement should clearly spell out the circumstances where somebody can be removed as a director or a shareholder or a partner. These clauses have to be fair and reasonable and should be carefully drafted but they can and should be drafted from the outset.
3. How often do partners and directors need to meet?
There is no set rule but meetings should be regular and the agreement should set out a minimum number of people, who should attend such meetings.
4. How do we divide profits?
Again, this is a matter for discussion and agreement and it is best arrived at in the very early stages. Nobody can tell how the future will proceed so there should be provision to have the matter reviewed on a regular basis. Profits can be divided depending on the amount of shares one owns in the company or the business or it can be determined by some other method – whatever fair method is agreed.
5. Can a partner or shareholder or director have an outside interest?
Yes, they can but provision should be made that they will devote their entire attention to the business and if they have another business then they should reveal this to their colleagues, who should approve in order to ensure that it does not interfere with the smooth running of their own business.
6. What happens if a partner/director becomes seriously ill, incapable or dies?
Again this is something that can be spelt out in an agreement. Generally speaking if no provision is made then person’s assets pass under the terms of their will or on the rules of intestacy. Sometimes this can cause enormous inconvenience and upset and it may be better to insert clauses in an agreement to cover such an eventuality. Pre-emption clauses are often used, which means that if a person is sick for a considerable period of time or dies then the remaining shareholder or partners can acquire their shareholding for a fair price.
7. How do you resolve disputes?
This is critical. The partnership agreement should spell out specific steps the partners have to take in the event of a dispute. Litigation should be a last resort so it is worthwhile spending some time agreeing an alternative dispute resolution, which will keep expense and upset to a minimum in the event of a dispute and hopefully improve the chances of an amicable resolution.
The bottom line here is that if you are involved in any business whatsoever with another person, PUT IT IN WRITING.
Kevin Brophy
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