Put It In Writing!
The benefits of having your partnership agreement in writing
Going into business with a friend, family member or someone who shares the same business goals as you do is always very exciting. The formation of a business relationship between two or more persons for the common view of profit is usually known as a partnership. Although a partnership under law can be formed between parties without the formality of a signed partnership agreement, the benefits of entering into a written partnership agreement, setting out key provisions in connection with the business of the partnership, outweighs the negatives associated with delays or inconveniences caused to partners on agreeing on key provisions affected the business of the partnership.
The obvious benefit of having a partnership agreement in writing is the benefit of having written rules in place governing the partnership, which is particularly useful when using the same to resolves disputes between partners.
This article sets out a number of key clauses and provisions included in written partnership agreements.
Termination of Partnership
Although termination of a partnership is an obvious negative to be considered by partners during the inception of a partnership, a termination clause is critical to a partnership agreement in particular when the relationship between the partners is no longer amicable, workable, and communication has ceased altogether.
The easiest way partners can end their partnership agreement is by way of mutual agreement. However what happens where a partner wishes to end the partnership due to other partner’s breaches caused under the partnership? In such case, the termination clause must include provision for a non breaching partner the right to end the partnership due to the other partner’s breaches and such partner’s failure to remedy the breaches within the prescribed period (for example 14 days from receipt of a default notice) and to the satisfaction of the non defaulting partner.
A termination of partnership clause should also include provisions providing a partner the right to immediately terminate the partnership agreement upon providing written notice to the other partner where such partner:
- has become a bankrupt (or in the case of a corporate partner has become insolvent);
- has been involved in criminal conduct involving dishonesty;
- has wilfully damaged the business;
- has been involved in conduct considered to be grounds for dissolution of the partnership by a Court.
Event of Termination
Where a partnership ends due to termination of the partnership agreement by the other partner(s), an event termination clause can assist the partners by setting out what is to happen following termination of the partnership agreement. This clause is usually drafted in accordance with what the partners expect to occur after the partnership ends, and as an example may include:
- the transfer of the registered business name or trademark of the business to a particular partner; or
- the business equipment contributed by a partner to the business returned to that partner upon end of the partnership; or
- intellectual property including confidential information, client lists, business systems and processes transferred to a particular partner and restrictions placed on the other partner(s) not to use the same without the written consent of the other partner.
A partner may wish to leave the partnership voluntarily. If the partnership can continue following voluntary retirement by a partner (“retiring partner”), the remaining partners usually have the “right of first refusal” to purchase the percentage interest of the retiring partner following a market valuation of the retiring partner’s percentage interest. A process is usually set out under the clause setting out the retiring partners’ obligations where the remaining partners do not purchase the retiring partner’s percentage interest in the partnership, for example such percentage interest may be sold to a third party approved by the remaining partners. If the partnership is forced to end due to the voluntary retirement of a partner, then the event termination clause will take effect to determine the partnership’s assets.
Where a partner dies or becomes permanently incapacitated or intellectually disabled, such events are normally deemed to be a voluntary retirement event under a partnership agreement, and the provisions of the voluntary retirement clauses take effect.
Admission of a New Partner
As the partnership business grows and develops, the partners may wish to admit a new partner to the business by way of unanimous agreement. The incoming partner will need to pay an amount towards any interest in the business they purchase, which reflects their percentage interest in the business.
Share of Profits and Losses
A partner’s entitlement share of profits and losses of the business is by way of a partner’s percentage interest. A partner’s percentage interest in the business is determined by that partner’s contribution to the partnership, and can be for example in the form of capital contribution, equipment contributed to the business, providing the business premises and any good will, contribution of intellectual property, or any other form of valuable consideration.
Duties of Partners
Partners under a partnership agreement have duties to each other. Under this clause, partners are obligated to act diligently and in the best interest of the partnership, punctually pay all moneys received on behalf of the partnership into the partnership account, act in good faith and not be involved in any conflict of interest effecting the business, punctually pay all separate and private debts (whether present or future) at all times, and keep the other partner(s) free from any claims in connection with such debts (including the provision of an indemnity indemnifying the innocent partners who have suffered any loss).
Roles of Partners in the Business
It is beneficial if the roles of each partner of the partnership business can be set out in the partnership agreement, however this is not essential. It should be noted that this may be impracticable from the beginning of a partnership, given that a partner’s role in the partnership business may develop or change over time. Provisions should exist under this type of clause to allow partners to amend their respective roles in the partnership business from time to time.
A partnership agreement can include a number of restrictions setting out rules and boundaries on each partner. Restrictions under this type of clause can also require the unanimous agreement of all partners, in particular on key items effecting the partnership or business. For example a partner must not:
- engage in any activity that will negatively affect or impact on the partnership;
- deal with property or assets of the partnership outside the ordinary course of business;
- lend money from the partnership account to any third party;
- purchase goods exceeding a set amount, outside the ordinary course of business;
- mortgage, charge or create a security interest in property or assets of the partnership;
- assign or transfer the percentage interest of a partner in the partnership;
- compromise or release any debts due or owing to the partnership.
Convening of Meetings
A partnership agreement includes clauses which set out how a partner may convene a meeting, provide notice of meeting to other partners, vote in accordance with its percentage interest, arrange proxy votes, complete resolutions affecting the partnership, hold meetings in person, determine a quorum, appoint a chairman for meetings, and prepare minutes of meetings signed by the chairman. Partners can meet at any time they wish to convene a meeting of partners. As a minimum, meetings are conveyed at least four times in a financial year.
A dispute resolution clause in a partnership agreement is important to set out the process for partners to resolve any dispute affecting the business of the partnership. This clause is particularly important where partners are unable to resolve the dispute themselves and require the intervention of an independent third party such as a mediator. A dispute resolution clause will provide how the partners will appoint a mediator, the duration or period for mediation, agreements reached at mediation shall be final and binding, information disclosed during mediation shall be on a without prejudice basis and confidential, the costs of the mediator to be shared equally between the partners, where the dispute cannot be resolved by mediation the dispute may be referred to a Court or Arbitration.
The partnership agreement may include other clauses in connection with the partnership business, and can be tailored to the partners needs.
In addition to the above-mentioned clauses, other clauses not mentioned in this article and found in a partnership agreement include:
- Definition and interpretation clauses;
- Commencement of partnership and duration clause;
- Name of partnership and place of business clause;
- Drawing from and bank account clause;
- Representations and warranties clause;
- Confidential information clause;
- Miscellaneous clauses.
Please contact Angelo Karamanis if you require assistance with preparation and/or advice in relation to a partnership agreement, shareholders agreement or unit-holders agreement in connection with your business.
Disclaimer: This article has been prepared as an informative paper only and is not in any way, shape or form legal advice.
Prepared by Angelo Karamanis on 23 August 2012
For more information on our services relating to business partnerships, see Corporate and Commercial.