Someone said to me once that there is no such thing as a perfect relationship, and no matter how good things are, at one stage, one partner will not be as happy as the other.
It is then critical that when going into business with an associate, ground rules about what to expect, what to contribute, and importantly, what to do if the relationship sours, are established right at the start and before things go bad. This can be done though a partnership agreement or a shareholders agreement.
A shareholder’s or partnership agreement can include provisions regarding:
- Direction and type of business undertaken
- Meeting Procedures
- Policies, Management, and Structure
- Procedures of appointment of directors or executives
- Voting rights and what decisions require votes
- What decisions are considered major decisions and what percentage of votes are required to pass these decisions
- The rights of minority voters
- Breaking deadlocks
- Shareholder’s exit strategies (including what happens if a shareholder passes away)
- Shareholder’s warranties
- Confidentiality agreements
- Restraint of trade
- Dispute Resolution
One of the matters that the agreement would deal with is in regard to exiting the business. This may happen due to retirement, disability or even death.
As many of the matters that a shareholder’s agreement covers is typically not covered by the company’s constitution, a shareholder’s agreement operates as a supplement to the company constitution.
An ideal shareholders or partnership agreement will deal with issues that have a distinct possibility of arising during the life of a business. It can also provide for a mechanism which resolves those same issues without the need of court intervention.
In summary, a shareholder’s or partnership agreement can deal with a wide variety of matters that may arise in the life of a business. Failure to address these issues early on can lead to expensive litigation to resolve the issues. Don’t leave these matters to chance or ignore it just because there are no problems at this point in time. You never know what is around the corner.
If you are starting up a new business with another associate, give us a call and we can help sort you out. 10