Partnership or Shareholder Agreement – Why you need one

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You might have heard the famous Benjamin Franklin quote: “Failing to prepare is preparing to fail”. In business, this certainly rings true. You could be starting a new business venture with someone else or maybe you have been in business for years with trusted business partners. Either way, you should consider the creation of a partnership or shareholder agreement to protect your business interests, your family, your reputation or your customers.

What is a partnership/shareholder agreement?

These agreements are a contractual agreement business parties enter into that forms a framework for the regulation of the entire business relationship.

There is no ‘one size fits all’. Each agreement needs to be tailored to your specific business requirements and circumstances. This ensures that potential issues are addressed and a pre-agreed resolution or plan is in place, especially if a partner agrees to exit.

What is covered by a partnership/shareholder agreement?

Every aspect of the business relationship should be covered by the partnership or shareholder agreement. This can include:

  • Financial contributions of each business partner;
  • How directors or partners are to be appointed;
  • Procedures relating to directors or partners exiting the business;
  • Procedures relating to directors or partners working in the business (for example, performance targets or director/partner roles);
  • Delegated authority, compliance and reporting obligations;
  • Dividends/profit distribution/policies;
  • Salaries and agreed bonuses of directors or partners;
  • Protocols in the event of the death or incapacity of a director or partner;
  • Procedures relating to defaults by directors or partners;
  • Anti-competition, restraint of trade, and non-disclosure agreements for directors or partners exiting the business;
  • Dispute resolution procedures.

Why do I need a partnership/shareholder agreement?

When things are going well and everyone in the business is working well with one another, it can be hard to imagine a time when circumstances change. However, unexpected things can happen and it pays to be prepared. For example, what happens if you have a falling out with a business partner, or a business partner dies unexpectedly? Would you know what would happen to that business partner’s responsibilities or shares?

Without an agreement in place, there can be great uncertainty in the future of the business.  If parties cannot agree on the outcome, there is a chance that the matter ends up in court. This will cost the business valuable time and money.

What if I am starting a business or have been running a business with my spouse?

You should still create a partnership agreement if you are starting or have been running a business with your spouse. In one Queensland case, the court was required to make a judgment relating to the dissolution of a husband and wife partnership upon the death of the husband, because there was no formal partnership agreement.[1] Money would not need to be spent on legal costs and court fees to deal with that issue if a partnership agreement was entered into whilst both parties were still alive.

Want to create a partnership or shareholder agreement?

Please contact our Business Development Team or call us on (07) 3252 0011 to book an appointment with one of our specialist Commercial Lawyers today.

Written by James Tan (Associate)

[1] Stevens v McGrath and Kane [2004] QSC 138.