Shareholders Agreement vs Partnership Agreement – What’s the difference and which one do I need?

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If you’re reading this, there’s a good chance you are looking to get a shareholder’s agreement done up for your business interests. Before you jump in, take about 5 minutes to read through what a shareholder’s agreement is, and how important it is to have when doing business :

What’s the difference Shareholders and Partnership Agreements?

A shareholders agreement is typically for registered companies (ending with Pte Ltd), whereas Partnership Agreements are for Partnerships Business Setups (e.g ending with LLP). Sole-proprietorships do not require a shareholders/partnership agreement as they are owned and managed by 1 person (the sole proprietor).

Investing in company shares can expose shareholders to a wide variety of risks. The company’s constitution, which is required by law, generally functions as a way to make those risks more manageable. However, the constitution is a macro-scale approach that encompasses all aspects of the company which means more specific benefits sought by individual shareholders could be difficult to incorporate (i.e different interests by different stakeholders).

So, what is a Shareholders/Partnership Agreement?

A shareholder agreement helps specifically define and protect shareholders’ rights and interests more effectively. It also specifically defines what the company can and cannot do and how it is going to be managed. It is, in a way, just as important as the company’s constitution for shareholders.

In business law, this contract is informed and guided by all of the parties involved such as shareholders and the company executives. It is a binding agreement that is in effect for as long as an individual holds shares unless or until the contract is terminated or if the company becomes insolvent or if it sold.

It’s a general partnership agreement that includes information pertinent to the shareholder such as the number of shares issued, capitalization table that outlines the shareholders and their ownership percentages, restrictions on share transfer, pre-emptive rights, and, in case of a company sale, details of payments.

Common clauses in a shareholders’ agreement

One of its most important features is that it can set restrictions on the transfer of shares. It can include, for example, rules limiting who can become a shareholder. In essence, it hinders unwanted investors from becoming shareholders in the company for whatever reason the current shareholders agree upon. Such rules can be enacted by mandatory buy-back agreements and right of first refusal clauses. These clauses can also help with the stability of the company. Since shareholders exercise control over the company, changes in the circumstances of one of the might negatively affect the company.

Another specific clause often included in these sorts of partnership is a confidentiality agreement. Aside from having some degree of control over the company’s direction, being a shareholder, especially if it’s a majority stake, might include perks such as access to company trade secrets. A shareholders’ agreement can prevent shareholders from engaging in a business that directly or indirectly competes with their holdings.

Deadlocks (Disagreements)

These types of contracts however, do not come without their disadvantages. If shareholders agree that certain decisions be made only through unanimous voting, deadlocks can often occur. This means that a small minority can potentially stagnate important developments with the company not being able to do anything about it.

Shareholder agreements are generally laborious and expensive to make but the benefit of having seamless transactions and peaceful interactions between shareholders pays off. In the beginning, this might not seem like an absolutely necessary expense but, as the business grows, a shareholder agreement might be the only things standing between a catastrophe and an amicable resolution to differences of opinions between shareholders and the company.

At this point, you should already begin to see how important a shareholder/partnership agreement is if you are venturing into business with others.

How do I get a Shareholders/Partnership Agreement ?

Simply click here to visit Lawyersearch’s legal document page, where you can fill up the simple form with details on what you require. Our lawyers will get in touch with you at the earliest opportunity (usually within 48 hours) to advise and help you out. You can also set up a consultation with them first before proceeding further.

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