October 26th, 2012 / Insight posted in

Protection for small shareholder

WR writes: My three colleagues and I have decided to turn our partnership into a company to take advantage of limited-liability status. But I am concerned that the protections and conditions in our original partnership agreement will no longer be valid. Is this so, and is there a mechanism by which the partnership agreement can be transferred to the company?

The partnership agreement will have no validity once business is done through a company. But a shareholders´ agreement, which is a formal arrangement similar to a partnership agreement, is a normal and arguably vital document to be drawn up by shareholders in private companies. This will ensure that nobody is disadvantaged by majority voting or is left out in the cold on retirement, and that dependants are protected on the death of a shareholder. The shareholders´ agreement normally contains provisions on how decisions are to made on matters such as directors´ pay, dividends and employment of key staff. It is designed so that big shareholders cannot impose their will through majority voting power, and is particularly important when shareholder voting can result in a damaging stalemate. Perhaps one of the most important aspects of a shareholders´ agreement is the provision for valuation and sale of the shares held by a dead shareholder. Often the shareholders´ agreement will contain provisions either requiring the remaining shareholders to purchase the shares of a dead holder at a fair value, or give the executors of a dead holder´s estate the right to sell shares to existing holders. Some shareholders´ agreements can become complicated and professional advice is worth taking. It is always important to discuss and enter into a shareholders´ agreement at the start of a venture and not leave it until a dispute arises and sensible agreement is unlikely to be achieved