Partnerships & Shareholders
Business Law Topics
Partnerships & Shareholders
If a number of parties are entering business together, there a number of things they must consider. For small and medium sized enterprises (often called “SME’s”) a successful business venture is largely due to the success of relationship between the parties themselves. In other words, parties should be satisfied that the person or people that they are going into business with are people that they can successfully interact, communicate and run the business with. Once everybody is satisfied as to the business relationship, they can decide whether they will operate the business through a company (dealt with below) or through a business partnership.
Any business can operate as either a company or through the individuals themselves as a partnership. Indeed in some cases certain regulated professions in Ireland (e.g. Doctors, dentists and lawyers) cannot deliver their service though a company. Where any parties go into business together (and not through a company), the law will presume a business partnership and apply the laws of Partnership to that venture. There are a number of legal rules to being in a partnership, the most significant of which is that the liability to each and every member of the partnership is joint and several meaning that each individual member of the partnership is fully liable in the full amount of any claim taken against the business. It is immaterial whether that partner has only contributed a small amount e.g. 10% of the start up capital to the business making him or her a small investor.
To protect each individual contributor to the business that parties must have a properly drafted and formed Partnership Agreement. This agreement will regulate such matters as the operation of the business by the parties, the exposure of each party to legal actions by customers and the division of profits or loss between the partners. A properly drafted agreement will also include an exit strategy for the protection of those wishing to leave and equally those remaining within the business. There a number of facet to a proper partnership agreement.
In the absence of a partnership agreement, where an irreconcilable dispute arises between the parties that is not capable to being resolved to the satisfaction of the parties, the only real option is to apply to Court to dissolve the partnership and determine the division of the business assets, if any. This will result in damage to goodwill and business reputation at a cost to everyone involved in the original venture. This one fact alone underlines the importance and necessity of a partnership agreement.
If operating though a company then, for the same reasons a properly constructed Shareholders Agreement is essential. In this context the agreement defines the relationship between parties who otherwise may not be overly familiar with each others business style It gives protection to all parties by controlling certain events in the operation of the business, e.g. drawings from the company’s account by either shareholder/director or the conditions in which the borrowing or operating costs of the company may be increased.
A Shareholders Agreement will also have a carefully drafted exit strategy for any one shareholder. An essential clause will typically be “pre-emption” rights i..e the automatic right to acquire the shares of the party leaving by the remaining shareholders or the company itself. The remaining owners can take control of the company in full and prevent the sale of shares to another party with whom they have no familiarity.
It is essential at all times to ensure that any partnership or co-owned company is based on a mutual relationship of trust so that recourse to law can be kept to a minimum. That being said if matters are properly regulated in terms of your paperwork then each party stands best chance of having a successful co-venture with a clear understanding and definition of each others roles. Without doing this, the parties are potentially investing their money into a business without any proper prospect of getting it back or indeed their due return.
We act and advise in relation to Irish law affecting both partnerships and shareholders. We draft and prepare partnership agreements to properly regulate the conduct business as between partners. We also act on, advise and draft Shareholders Agreements and put and call options. As always are fees are competitive and our costs transparent. Where possible we agree fees at the outset.