Category Archives: Legal News

PARTNERSHIPS: A GUIDE

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A partnership is where two or more persons, the partners, enter into business together and share the risks, costs and responsibilities of being in business. A partner can be an individual or another business e.g. a limited company or another partnership.

There are three types of partnership:

  1. Ordinary Partnerships – an ordinary partnership does not have legal existence separate from the partners. Consequently in the eyes of the law it is not a separate legal entity like a company. Unlike the directors of a limited company, partners in an ordinary partnership have personal liability for all of the debts of the partnership.

In an ordinary partnership if the partnership has debts, the partners are jointly liable for the debt owed and so are equally responsible for paying off the whole debt. Creditors can claim a partner’s personal assets to pay off any debts, even those debts caused by other partners. Therefore, in an ordinary partnership the partners’ personal assets are not protected in the event that the business fails.

  1. Limited Partnerships – a limited partnership is made up of a mixture of ordinary partners and limited partners.

In a limited partnership ordinary partners are jointly liable for any debts owed by the partnership and so are equally responsible for paying off the whole debt. However a limited partner’s liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance.

  1. Limited Liability Partnerships (LLPs) – a LLP is a hybrid between a company and a partnership in that LLPs must register with Companies House, send Companies House an annual return and file accounts with Companies House.

LLPs have the advantage of limited liability, partners are not personally liable for the debts of the partnership. In a LLP a partner’s liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given. Thus partners have some protection if the business fails since the partners’ personal assets are protected to a certain extent.

A Partnership Agreement is a contract between the partners of a business.

There is no legal requirement to enter into a partnership agreement as the law will automatically impose a default set of rights and obligations to govern the partnership and the relationship between the partners if they don’t. Consequently partnership agreements are voluntary; they set out the rights and obligations of the partners and regulate the relationship between the partners with the aim of protecting the partners’ investment in the business.

In order to avoid costly disputes we recommend to enter into a written partnership agreement as it lets the partners know where they stand in relation to each other and the business. Also, since in the absence of a written partnership agreement the law will impose a default set of rights and obligations on the partners, having a written partnership agreement in place gives the partners the opportunity to vary or exclude the default position.

A partnership agreement sets out detailed and practical rules in respect of the partnership and its partners. Generally the agreement will:

  • regulate the partners’ investment in the business;
  • protect the partners’ interests and secure the future of the business;
  • set out whether property used by the partnership belongs to the partnership or to individual partners;
  • provide a written structure for the business clearly setting out each partner’s responsibilities, rights, profit/liability sharing, rules relating to business entry and exit, and also the terms on which disputes are resolved and the partnership can be terminated;
  • set out how the partnership is going to be run;
  • regulate how important partnership decisions are to be made, and
  • help avoid costly misunderstandings and conflicts.

A partnership agreement will make the day-to-day operation of the partnership smoother and prevent problems from escalating into full-blown crises. It formalises the partnership arrangements allowing the partners to agree on how to handle particular situations before they arise. A badly drafted or non-existent partnership agreement may expose partners to a range of potential issues, leading to an unsuitable business structure and ultimately to partnership dissolution.

The Legal Stop has a several partnership agreements each fully comprehensive and specifically drafted for the particular type of partnership that you are intending to establish, whether an ordinary, limited or limited liability partnership. For more information please visit our website www.thelegalstop.co.uk.

Shareholders’ Agreements

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A shareholders’ agreement is a legally binding contract between the shareholders of a company; it regulates the relationship between the shareholders in order to protect the interests of the individual shareholders as and against each other. A shareholder agreement is an essential document for any company to have especially if there is more than one shareholder. It provides protection for the shareholders and establishes a fair relationship between them. Generally a shareholder agreement sets out the rights and obligations of the shareholders, regulates the sale of shares in the company, details how the company is going to be run and how decisions are to be made.

Here are some uses of shareholders’ agreements:

  • To give to a shareholder rights which would otherwise be unenforceable if inserted in the company’s Articles e.g. personal rights such as a right to be appointed as a professional adviser to the company.
  • To regulate the relationships between shareholders which have nothing to do with the administration of the company, e.g. if one or more shareholders are investing in the company.
  • To protect minority shareholders’ rights e.g. by giving them a power of veto which they would not otherwise enjoy under Company Law.
  • To preserve confidentiality. Articles of Association are open to public inspection, thus it may be more appropriate in some circumstances to deal with matters in a shareholders’ agreement for reasons of confidentiality.
  • To provide a way to transfer shares in the business and help run the business smoothly in the face of future events such as death, disability or retirement of a shareholder. Shareholders’ agreements generally establish a purchaser for the shares of the deceased or existing shareholder, a formula for determining the purchase price of the shares, and a method for funding the purchase.

In the absence of a shareholders’ Agreement any disputes between shareholders will have to be settled by what is contained within the Articles of Association, however the Articles generally do not offer shareholders full protection.

The Articles of Association of a company are the rules governing its internal management and administration. The Articles are governed by Company Law and are binding on all the members of the company. A shareholders’ agreement is an agreement between the members of a private limited company which is governed by the normal law of contract. Some matters covered in a shareholders’ agreement may equally be incorporated in the Articles of Association for example pre-emption rights. However, bearing in mind that the Articles of Association are open to public inspection, it may be more appropriate in some circumstances to deal with matters in a shareholders’ agreement for reasons of confidentiality. Furthermore, shareholders’ agreements are often used to give protection to shareholders because they provide for what happens if ‘things go wrong’, if there is a falling out between the shareholders. Also, a shareholders’ agreement contains detailed provisions to cover specific issues and it gives a contractual remedy if its terms are broken.

There are also some drawbacks with shareholder’s agreements. There may be complications when a member who is signatory to a shareholders’ agreement transfers shares since the new member must agree to be bound by the shareholders’ agreement and the old member released from it. Also Shareholders’ agreements can become unwieldy if the number of shareholders increases substantially.

Clauses commonly included in shareholders’ agreements are:

Provisions covering initial funding and further financing of the company. Warranties and indemnities from existing shareholders to a new shareholder/investor. The appointment of auditors and bankers. Provisions governing the application of funds invested. Provisions governing any personal guarantees given by a shareholder to third parties dealing with the company. Dividend policies. Rights of first refusal in the event of a shareholder wishing to transfer his or her shares (pre-emption rights). Compulsory transfer or option arrangements. Covenants not to compete with the company nor to solicit its customers, suppliers, officers or employees. Undertakings of confidentiality. Provisions for protection of minority shareholders (e.g. rights of veto). Mechanisms for dealing with deadlock.

Please note that this list is not an exhaustive. Shareholders’ agreements can take a variety of forms and can serve a variety of purposes, they can range from the extremely simple to the extremely complicated.

We have a large number of documents including shareholders’ agreements.

Our shareholders agreements are fully comprehensive and contain detailed and practical clauses, including clauses dealing with:

  • transfer of shares in the company,
  • pre-emption rights on a transfer of shares,
  • deadlock which determines how disagreements on key issues are to be resolved,
  • drag-along enabling a majority shareholder to force a minority shareholder to join in the sale of a company,
  • tag-along protecting the interests of minority shareholders where the majority shareholder is selling out, thus allowing the minority shareholders to jump on the back of the buy-out,
  • confidentiality, non-compete, non-solicitation and non-poaching to safeguard the interests of the company.

 For more information click here:http://www.thelegalstop.co.uk/Corporate.html

 All business relationships start out with good intentions, however, they all have the capacity to go horribly wrong. Disputes can arise between shareholders for many reasons and shareholder agreements are supposed to take account of such eventualities.

We strongly recommend that all companies with more than one shareholder enter into a shareholders’ agreement since it provides a piece of mind and lets everyone know where they stand so to avoid costly disputes in the event of a falling out between shareholders. Also, venture capitalists usually require a shareholders’ agreement as a condition of funding.