Do you and your business partners have a Shareholders Agreement?

Before you start your journey in business, you are in love with the business, but when the relationship goes sour it can turn to you know what!!

Being in business with someone, whether work colleagues or friends getting together is a like a business marriage and therefore you need something in place that can be used to help solve disputes.

The best time to prepare a Shareholders/Partnership agreement is while you are “in love”. This is usually when you are about to start a business or taken the reins from someone else in the business and you are “in love” with being a business owner.

What is a Shareholders Agreement?

A Shareholders / Partnership Agreement covers the funding, structure, management and direction of the business. It outlines the responsibilities and obligations of the business owners and provide guidance should there be disputes between business owners.

Why do we need one and when should we get one?

It is designed to deal with the issues that may arise during the life of a business, by determining in advance, how such issues should be dealt with (hence my comment above about doing it “whilst you are in love”).

The process of developing a Shareholders Agreement and the content included will differ between each entity after discussion and input involving all the relevant partners/shareholders and their relevant advisors. There is no ‘one size fits all’ approach.

What other measures are in place should there be a dispute?

It is a good opportunity for you and your business partner/s to have a think about what you personally want from your business and then collate and collaborate those thoughts with your other business partners.

It is ideal to discuss the items below openly and freely to keep communication lines open. You will get an understanding of each other and the direction that you personally see the business going very quickly!

Common features of a Shareholders/Partnership Agreement include:

• How do we add or remove partners/directors/shareholders?
• What key business decisions that require a unanimous decision?
• Frequency and timing of Directors Meetings (should be regular with an agenda and notes taken)?
• Expectations, roles and responsibilities of a partner/director (or principle of a shareholder) within the business.
• Dividend/Drawing policy & loan accounts within an entity.
• Consequences in the event of death or permanent/temporary disability of partners/directors/principal in the event of death. (There are insurances available to protect this, however we would need to refer you to a business insurance specialist).
• Determining goodwill calculations on entry and exit Agreements need to cover in what circumstances a goodwill payment is made and how any such payment is to be calculated.
• Restraint requirements and notice period on retirement. Care needs to be taken to ensure that any restraint requirements set out under an agreement are enforceable, and do not invalidate the whole agreement.
• Requirement for capital on the happening of a defined event. There may be a need for capital injections into the entity in periods of declining business growth or insufficient economic activity.

A pre-agreed resolution process is extremely important and can save the parties to a Shareholders’ Agreement a lot of time, money and inconvenience in the unwanted event of a major dispute.

On too many occasions, business owners don’t consider a Shareholders Agreement, usually taking the “she’ll be right” approach or the “we have been mates for years” or “I’m sure we can work it out if there is a problem”.

HBT Advisory works with clients to discuss planning opportunities for the business, but also works with the key individuals that are involved within that business. A Shareholders Agreement is a legal agreement and therefore is required to be prepared by a solicitor, however having these conversations with your Accountant can be important to the content of the Shareholders Agreement.

Feel free to contact Andrew to arrange a meeting (either at the office or at your business premises) to discuss the strategic direction of your business.