Shareholders and partnership agreements

What the default position leaves out

Without an agreement, the relationship between owners is governed by the company constitution or the Partnership Act, plus the general law. Those handle the mechanics competently and the human problems barely at all. They do not tell you what an exiting owner's share is worth, who is entitled to buy it, what happens when two equal owners disagree, whether a departing owner can set up next door, or what a surviving spouse inherits and whether the remaining owners have to work with them.

Decision-making and deadlock

Most agreements set out which decisions need unanimity and which need a majority. Fewer deal properly with deadlock - what actually happens when a fifty-fifty business cannot agree. Options include a casting vote, an independent expert, a mediation step, or a buy-sell mechanism that forces one side to buy or sell at a price the other sets. Choosing one in advance is much cheaper than litigating the absence of one.

Exit: the provisions that matter most

Exit terms do most of the work in practice.

• Pre-emptive rights - existing owners get first refusal before an interest is sold to an outsider.
• Valuation - how the interest is priced, and by whom. An agreed method beats an argument about method.
• Drag-along and tag-along - protecting a majority selling the whole business, and protecting a minority from being left behind.
• Payment terms - whether the exiting owner is paid out at once or over time, which is often what makes an exit survivable for the business.
• Compulsory transfer events - insolvency, serious breach, or ceasing to work in the business.

Death, incapacity and insurance

If an owner dies, their interest passes under their will, which may mean the surviving owners find themselves in business with a spouse or an estate. Agreements commonly deal with this through a buy-sell provision, often funded by life and total-and-permanent-disability insurance so the money exists when it is needed. This only works if the agreement, the insurance and each owner's will say the same thing - and they frequently do not, because they are prepared by different people at different times.

• Wills, enduring powers of attorney and guardianship →

Restraints, confidentiality and intellectual property

When an owner leaves, the question is what they can take with them. A restraint of trade must be reasonable to be enforceable, which means it needs to be drafted against the actual business rather than copied from a template. Non-solicitation of clients and staff is often more valuable and more defensible than a blanket restraint. Where the business depends on know-how, brand or software, the agreement should also make clear that it belongs to the business and not to the person who created it.

Partnership agreements

The same ground applies to partnerships, with the added point that partners are generally liable jointly and severally to outsiders regardless of what they agree between themselves. A partnership agreement cannot limit that external exposure, but it governs contributions, drawings, decision-making, admission of new partners, retirement and dissolution - and it is what a court will look at if the partnership ends badly.

• Partnership agreements and disputes →

When to write it

The honest answer is at the start, when the owners agree about everything and nobody knows who will want out first. That is precisely when it feels unnecessary. The second-best time is now, while the relationship is still functioning. Once a dispute has started, every clause is read as a move by one side against the other, and agreement becomes far harder to reach.

Process

1. 1

   We identify the owners, their contributions, and what each expects from the business.

2. 2

   We work through decision-making, deadlock, exit, death and incapacity, and restraints.

3. 3

   We check the agreement against the company constitution or partnership arrangements so they do not contradict each other.

4. 4

   We check it against each owner's will, so succession and buy-sell provisions align.

5. 5

   We prepare the agreement and explain the practical effect of each mechanism before signing.

6. 6

   We review it when ownership, roles or the business itself change materially.

What to prepare

• Company details and constitution, or existing partnership arrangements.
• Who owns what, and what each owner contributed.
• Any existing agreement between the owners, including informal or email arrangements.
• Details of each owner's role in the business.
• Existing wills, where succession is to be addressed.
• Any keyperson, life or disability insurance already in place.
• Major contracts, leases and finance documents.

Risks, deadlines and common mistakes

• Relying on the constitution to do a job it was never drafted for.
• No deadlock mechanism in a business owned fifty-fifty.
• An exit clause with no valuation method, which turns every exit into a negotiation from zero.
• Buy-sell provisions that contradict the owners' wills or are unfunded.
• A restraint copied from a template and unenforceable when it matters.