Partnership Agreements and Shareholders Agreements

The allocation of profits and losses among partners by default is equal but is typically outlined in a partnership agreement which can provide more elaborate forms of profit share. It may outline equal sharing of profits and losses among partners, or it may specify a different allocation based on the partners' capital contributions, invested time and effort, or other factors.

It's important for partners to carefully review and understand the profit and loss allocation provisions in the partnership agreement before entering the partnership. This can help to avoid misunderstandings or disputes down the line, and can help to ensure that each partner's contributions to the partnership are fairly recognised and rewarded.

In a limited company, the distribution of profits by way of dividends between the shareholders will depend on the rights attaching to each share and decisions that are made by the board of directors and majority shareholders. While entitlement to declared dividends is dictated by the share rights, it is possible to create multiple types of share and set out arrangements in the shareholders agreement to provide structure as to how and when dividends will be declared and on what shares and in what percentages. This can give more certainty to the parties than leaving it as a majority decision.

A partner cannot be expelled by default but arrangements can be included in a partnership agreement for a partner to be expelled from or leave a partnership in certain circumstances. The specific rules and procedures for expulsion or withdrawal are usually set out in the partnership agreement.

If a partner wishes to leave the partnership, they may need to provide notice to the other partners, and may also need to follow certain procedures or meet certain conditions as outlined in the agreement. Similarly, if a partner is being expelled, the partnership agreement will usually specify the procedures and conditions for the expulsion, including any notice requirements and the right to challenge the expulsion.

Similarly, it can be extremely difficult to obtain another shareholder’s shares, thereby removing them as a stakeholder, unless specific provision is made for this in a shareholders agreement or the company’s constitution. A number of processes can be included in a shareholders agreement to enable a transfer of shares either under compulsion, such as for breach of the agreement by or on the death of a shareholder, or as part of a planned exit strategy thereby preventing a minority from blocking that exit.

If the parties wish to amend the agreement, they must generally act unanimously or follow any specific procedures set out in the original agreement. Such alternative procedures can include obtaining the consent of a specified majority of partners, or a major investor and recording the changes in a written amendment to the agreement. These rules can be drafted to apply to all or only certain aspects of the agreement.

Similarly, if the parties wish to terminate the partnership or dispose of or close the company, provisions regulating this will usually be set out in the original agreement. This may involve giving notice, paying off any outstanding debts or obligations, disposing of the assets or selling all of the shares, and distributing the proceeds of sale accordingly.

It is recommended to seek legal advice before making any significant changes to a partnership agreement or shareholders agreement to avoid unintended consequences and to ensure that the changes are legally binding.

The process for admitting new partners or new shareholders may vary depending on the terms outlined in the agreement itself. It may involve the unanimous consent of all existing partners or shareholders, or may require a certain percentage of them to agree to the admission of a new business partner. Additionally, a new business partner may need to contribute capital to the partnership or provide a loan or pay a share premium to the company.

With a partnership, typically the consent of all partners will be required as the partners will share joint and several liability for each other as partners. With a company, new shares would usually be required to be offered to the existing shareholders before they could be offered to third parties, but the agreement can make other arrangements.

Overall, the process for admitting new partners can be complex and involve legal considerations, so it's recommended to consult with a lawyer to ensure the process is properly documented and all necessary legal requirements are met.

Partners or co-owners can have different levels of authority or decision-making power in a partnership agreement or shareholders agreement. The agreement can outline specific roles and responsibilities and extent of decision-making powers. For example, a partner or nominated director may have the authority to make certain decisions without the input or agreement of the other partners, directors or shareholders. Certain decisions can be reserved to require the consent of one or more identified partners or shareholders, giving them an effective veto, or to defined majorities. This can vary between different types of decision, such as profit sharing, material new expenditure, and expulsion.

It's important to clearly define the decision-making process in the agreement to avoid disputes or confusion. If there are differences in authority or decision-making power among parties, it's recommended to document these differences carefully in the partnership agreement or shareholders agreement to ensure everyone is aware of their respective roles and responsibilities, any limitations on their authority, and the processes to follow to get the appropriate consent.