Can business partnerships work? We’ve been asked this question a lot over the years, and subsequently we’ve written about it a lot too. The simple answer would be: No. Business partnerships don’t work. Especially during the current strained economic times, it’s not a coincidence that director, shareholder and partnership disputes are arising more frequently. But they can work. 

Jay from Jarman’s Solicitors explains how to prevent disputes from arising and make partnerships work, even in the current economic climate. 

Prevent, rather than cure 

  1. Sit down and be honest with each other from the start. Think about: allocation of risk, who is putting in what money and what responsibility they are taking, who is doing what, etc. And be particularly clear about profit sharing, otherwise the law may govern what each party receives 
  2. Think about exit right at the start 
  3. Include deadlock provision, e.g. have a casting vote
  4. Include a dispute resolution mechanism
  5. Distill the above into an agreement (you can download A4G’s free partnership agreement at the bottom of the page). Make sure you are being completely transparent, otherwise resentment will be sown at any early stage 

Typical problems and how to resolve them 

Deadlocked companies 

A deadlocked company is where two shareholders have equal voting and management rights but are no longer able to work together. Usually these are resolved by way of an unfair prejudice petition under Section 994 of the Companies Act. To succeed, the complaining shareholder must demonstrate fault on the part of the other shareholder (i.e., that the company’s affairs are being conducted in an unfairly prejudicial manner). 

Of course, this is absent of any provisions in the articles of association or shareholders’ agreement to break a deadlock (this is why they are so important!). There is no such thing as “no fault divorce”. 

Alternatively, an application can be made under Section 122 of the Insolvency Act 1986, on the basis that it is just and equitable that the company in question, even though solvent, should be compulsorily wound up. 

Out of court solutions for deadlocked companies:

  1. Chairman’s casting vote
  2. Outsider’s vote
  3. Reference to shareholders
  4. Mutual put and call options 
  5. Arbitration or expert resolution 

So can business partnerships work? Of course. The key is to prevent, rather than cure. Set up a detailed partnership agreement from the very start, even if you’re setting up a business with your best friend. Things can unexpectedly quickly turn sour. We’ve made it really easy for you by creating a business partnership template below. You have no excuses now!

If you’re currently in a business partnership and things are starting to look a bit problematic, contact Jay at j.sahota@jarmans-solicitors.co.uk. 

Download

Partnership Agreement Questionnaire

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