When starting a new business venture you are eager to get up and running as soon as possible with formalities to be completed as quickly, and cheaply, as possible. Putting in place and updating relevant agreements in relation to your business is often far from everyone’s thoughts, however it is more valuable to have certain matters in order at the outset. Having particular agreements in place and reviewing them accordingly can better define the rights and obligations of those involved by ensuring the intentions of all parties is clear which in turn will reduce the risk of dispute and expensive legal costs further down the line.
Partnership Agreement
What is it?
A partnership is a relationship or association between two or more people with a view to profit and may compromise of individuals and/or companies. A partnership agreement can deal with a wide range of matters which can avoid any unwanted consequences. Such matters include the control and decision making of the partnership, the ownership of partnership property, introducing and expelling partners, how to dissolve the partnership and the sharing profits.
Why is it important to have one in place?
Businesses founded by partners begin with all partners sharing the same vision towards their business. The ethos, ideals and hopes are aligned however over time issues can emerge and the goals of a partner may change. In the absence of a written agreement the provisions set out in the Partnership Act 1890 (!) apply instead. The default position set out in the Act may not be attractive to the partners. In the absence of a written agreement, any disputes will often result in costly legal proceedings and unnecessary financial losses for all parties.
Shareholder Agreement
What is it?
A shareholder agreement is an agreement between the owners of a private company that is limited by shares. The agreement works in conjunction with a company’s articles of association, but will give shareholders greater protection than can be provided by the articles alone.
The terms of the agreement can be drafted in such a way to protect minority shareholders from being outvoted or allow majority shareholders to take action without the entire decision of the shareholders. It can also list the decisions which the directors must take to shareholders, such as decisions to sell key assets or acquire assets of a specific nature (such as land). Moreover a shareholder agreement can specifically regulate certain transactions such as valuation of shares, succession plans and drag and tag along option.
Why is it important to have one in place?
As set out with the importance of a partnership agreement, similarly, the terms in the agreement can regulate what will happen should any shareholders “fall out”. Additionally, the position and intentions of the parties are clearly set out in writing and this will reduce the need for any litigation in relation to a potential dispute.
Whilst this is a negative view to take, such occurrences or situations are hard to foresee starting out however to plan ahead, consider and deal with this situation will reduce the potential for conflict between shareholders at any later date and help the company run smoothly and profitably.
Articles of Association
What are they?
A company’s articles of association are the public document which regulates the internal management of and the administrative structure of the company. Essentially, they are the written rules outlining how the company operates, how officers and directors are appointed, what powers they have, the issue and transfer of shares, dividends, and board and shareholder meetings.
Why is it important to update them?
Many companies have adopted the most recent government-prescribed form of default articles (known as the “Model Articles”). Other companies, however, are using older versions of the articles which refer to outdated sections of the previous Companies Acts or they contain provisions that are no longer relevant for the company.
It is common for articles to be neglected and then when important questions arise in relation to the company’s constitution (for example, whether a member’s share can be transferred to a third party or whether a directors appointment can be terminated), it often transpires that the current articles are not appropriate or they fail to reflect the intention of the company.
Much like in the absence of a partnership agreement or shareholder agreement, failure to update your company’s articles can result in expensive legal fees and leave parties in a position where they are powerless to achieve their desired outcome.
Business Lasting Powers of Attorney (‘LPA’)
What is it?
A business LPA allows a business owner to appoint a suitable attorney to make decisions containing their business interest when they are unavailable or lack mental capacity.
Why is it important to have one in place?
If there is no business LPA in place, certain risks arise. For instance, if one of the bank account signatories lacks capacity the bank can freeze the account to protect the now vulnerable adult. Paying creditors, employees or tax becomes difficult as does running the business generally.
Whatever the structure of your business, ensuring that the correct written documentation is in place and up to date is highly important for the survival of the business in disputes. The documentation required will depend entirely on your individual business however implementing and reviewing the same will ensure that the intentions of all parties are clear and the risk of future expensive legal fees further down the line is reduced.
Here at Jacksons, the Corporate and Commercial team are experienced in advising businesses in relation to the appropriate corporate governance arrangements and drafting the same and are more than happy to assist you – Jacksons’ Corporate and Commercial team
