Starting a business is an exciting journey, but it can also be filled with challenges, especially if you have partners or shareholders. 

If you’re a business leader that’s eager to learn and grow, you will find ways of overcoming the obstacles you face as your business develops. When it comes to mitigating or addressing potential issues related to your shareholders or business partners, it’s important to make a legally binding agreement that is mutually beneficial to all parties to ensure a smooth business operation.

A shareholder agreement is a legally binding agreement between the shareholders of a company that outlines the rights and obligations of each shareholder. It typically covers issues related to ownership, management, and control of the company. The shareholders and the business are considered separate legal entities, so if the business files for bankruptcy, the shareholders might not be considered bankrupt. 

A partnership agreement is a legal document that governs the relationship between partners in a business. It outlines the terms of ownership, responsibilities, and decision-making processes for the partners. Unlike shareholders, partners might share the liabilities of the business, so they might also be considered bankrupt if the business files for bankruptcy. 

Having a legally binding shareholder or partnership agreement is crucial for any business with more than one owner. Without an agreement, the owners may have different expectations and interpretations of their roles and responsibilities, leading to conflicts and disputes. 

A well-drafted agreement can provide legal protection and prevent misunderstandings and disagreements, which can be time-consuming and costly to resolve.

Key elements of a shareholder or partnership agreement

We’ve shortlisted important elements that you must include in a shareholder or partnership agreement. This will ensure that the agreement is beneficial to and clearly understood by all parties involved.

1. Ownership and equity distribution

The agreement should clearly state the ownership structure and equitable distribution of the business. This includes the number of shares each shareholder or partner holds, how new shares will be issued and how profits will be distributed among the owners.

It’s also wise to incorporate any share buybacks or first rights if a shareholder is going to sell. Furthermore, you may want to document business valuation methods in case shareholders exit the business or in the event of death. You don’t want to suddenly find yourself in business with your partner’s spouse who knows nothing about running the organisation. 

2. Roles and responsibilities

The agreement should outline the roles and responsibilities of each owner, including their management duties and decision-making authority. This could define the areas of remuneration for specific roles as well as the scope of each owner’s authority to avoid confusion and potential conflicts.

Because a company is a separate legal entity, shareholders are not responsible for a company’s legal obligations. Shareholders are typically not responsible for a company’s debt unless they have any amount unpaid on their shares. A shareholder may have additional duties depending on what is outlined in the shareholders’ agreement, doubly so if an individual is both a shareholder and director in the company.

3. Decision-making processes

The agreement should establish the decision-making processes for the business, including how major decisions will be made, who has the final say, and what happens if there is a tie vote. This can prevent disagreements and ensure that the business operates smoothly.

According to CPA Australia, common features in a partnership or shareholder agreement concerning decision-making processes include:

• Some decisions by an entity, such as a merger or acquisition, may have special rules or provisions to keep in mind while day-to-day decisions may be delegated or determined by a majority vote.
• All delegated decisions must be officially formalised, specifying the scope and limitations of an individual partner’s authority and power.

4. Dispute resolution mechanisms

It’s natural for shareholders or partners to have disputes, what’s important is establishing clear mechanisms that you can use to efficiently resolve these issues so that they don’t escalate into irreconcilable conflicts.

There are three strategies for resolving shareholder disputes: 

• Mediation – A mediator can help involved parties discuss their issues in a diplomatic manner and a calm environment. This strategy is best used early on before tensions escalate beyond manageable levels.
• Arbitration – This is a form of trial presenting two sides that are enforced by the courts. An independent party analyses the situation and makes a decision that is binding for both parties.
• Litigation – This involves settling a lawsuit in a public court of law to resolve disputes. This is typically a last-resort solution, as it can become an expensive and drawn-out affair.

Establishing these mechanisms in advance can prevent conflicts from escalating and protect the business from costly and tedious legal disputes.

How to draft a shareholder or partnership agreement

There are four fundamental steps you can take in ensuring that you draft a clear and legally binding agreement for you and your partners or shareholders:

1. Seek Legal Advice

Drafting a shareholder or partnership agreement can be complex. It is advisable to seek legal advice from a qualified attorney who can guide the relevant laws and regulations.

2. Identify and Discuss Key Issues

The owners should identify and discuss the key elements and issues that need to be addressed in the agreement. This can include ownership structure, equity distribution, management roles and decision-making processes.

3. Outline the Agreement

Once the key elements and issues have been identified and discussed, the agreement should be outlined. This should include the ownership structure, roles and responsibilities, decision-making processes and dispute-resolution mechanisms.

4. Review and Finalise the Agreement

The final step is to review and finalise the agreement. All owners should review and approve the agreement before signing it. It is also advisable to have a lawyer review the agreement to ensure it is legally binding and enforceable.

Aside from listening to the expert advice of your lawyer or attorney, having a professional business coach by your side during this process can also give you much-needed perspective and insight into creating an effective and mutually beneficial shareholder agreement. A business coach will have the acumen and experience to understand how a shareholder or partnership agreement can benefit you.

Benefits of a legally binding business agreement

There are many benefits to implementing a legally binding agreement for your business.

1. Legal protection

Having a legally binding shareholder or partnership agreement can provide legal protection for the business and the owners. It can help to prevent disputes and conflicts and provide a clear framework for resolving any legal issues that may arise.

2. Clear expectations and guidelines

The agreement can provide clear expectations and guidelines for the owners, including their roles and responsibilities and decision-making processes. This can prevent misunderstandings and ensure that the business operates smoothly.

3. Prevention of conflicts and disputes

The agreement can prevent conflicts and disputes from arising by establishing clear guidelines for ownership, management, and decision-making. This can save time and money in the long run by avoiding costly legal battles.

4. Easy dissolution process

The agreement can also include provisions for the dissolution of the business in case the partnership or business relationship ends. This can ensure a smooth and easy dissolution process, without the need for legal battles or disputes.

Having a legally binding shareholder or partnership agreement is essential for any business with more than one owner. The agreement can provide legal protection, prevent conflicts and disputes, and establish clear expectations and guidelines for the owners.

To draft a successful agreement, owners should seek legal advice, identify and discuss key issues, outline the agreement, and review and finalise it. In case conflicts arise, the agreement can provide effective mechanisms for dispute resolution, including mediation, arbitration, or litigation. 

By taking these steps, owners can ensure a smooth and successful business relationship.

Contact us if you would like us to make sure your business has the right foundations and strategies for success.