Shareholder / Partnership Cross-Option Agreements

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SHAREHOLDER / PARTNERSHIP CROSS-OPTION AGREEMENTS

A Shareholders’ Agreement (SHA) goes a long way to preventing disputes from spiralling out of control. It’s essentially a contract between the shareholders of a company (although it does not have to be between all of the shareholders of a company) with the purpose of protecting the longevity of the company by providing a framework for decisions to be made or for disputes to be resolved by the shareholders.

An SHA will, amongst other things:

  • set out a shareholder’s rights and obligations;
  • define how decisions are made;
  • describe how a company is going to be run;
  • provide protections for minority shareholders and the company;
  • provide greater confidentially than public available company documents such as the Articles of Association;
  • regulate the sale of shares in the company; and
  • define triggers for the mandatory transfers of shares in certain situations.

Whilst an SHA can provide for the mandatory transfer of shares in the event of the death of a shareholder, a Cross-Option Agreement will create a series of options through which the surviving shareholders of a company can purchase, or be forced to purchase, a deceased shareholder’s shares from their estate at an agreed or fair value.  These options are designed to benefit both the deceased’s family and the surviving shareholders; the family receive fair price for the shares, and the surviving shareholders retain control of the company.

When should I enter into an SHA or a Cross-Option Agreement?

The best time to enter these agreements is at the beginning of the business relationship and to consider reviewing and updating the documents as and when the business progresses and/or further investments are made into the company.  Whilst there are no time limits for putting an SHA or Cross‑Option Agreement in place, it is certainly advisable to ensure appropriate documentation is in place prior to the death of a shareholder and prior to any disputes arising between the shareholders.

If you are considering investing in a business as a shareholder, or if you are already a shareholder and want to review the protections you have in place, please do contact us.

Partnership Agreements

The formalities for starting and running a business partnership can be surprisingly simple and straightforward. Unlike a limited company, there are no fees or paperwork required to set up the partnership and no requirement to file annual accounts on a public register. It is therefore all too easy to overlook the importance of entering into a professionally prepared partnership agreement.

In the absence of a partnership agreement stating to the contrary, the default position is that:

  • all partners will have the right to participate in the management of the partnership;
  • all profits will be shared equally;
  • ordinary partnership business decisions will be decided by a majority of the partners;
  • fundamental decisions affecting the partnership will require unanimity;
  • if one partner leaves or dies, the partnership will automatically be dissolved.

If partners have invested different amounts of capital into the business it is often more appropriate for voting and profit sharing to be weighted in favour of those who have invested the most in the business. Equally, where there are more than two partners it would undoubtedly be preferable for the partnership to continue if one of the partners left the partnership or died.  In addition to dealing with these aspects of the partnership, a partnership agreement can be useful in setting out procedures for dealing with any future disputes between partners.

LLP Agreements

Often used for professional firms, a limited liability partnership (LLP) is a hybrid between a partnership and a limited company. Unlike a partnership, the financial liability of its members is limited to the amount they have invested and it is also required to file its annual accounts on the public register at Companies House.

The informalities of running an LLP are similar to a partnership and therefore the need for a professionally prepared LLP agreement is often dismissed. However, in the absence of an LLP agreement the default position is very similar to a partnership where there is no partnership agreement between the partners. It is therefore always advisable to have an LLP agreement in place.

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