| WHAT SHOULD BE DONE TO PROTECT PARTNERSHIPS? |
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By Daniela Coetzee In a partnership, what agreements/contracts should be put in place to protect the partners from individual liabilities for the duration of the partnership and also to ensure that each partner has the opportunity to buy the other's share in the event that one dies while the partnership is still in place? You can only avoid individual liability if you trade as a company or close corporation. However, please bear in mind that in both instances, the court has the power to fix personal liability for the debts of the company or close corporation on the individuals if they are knowingly party to reckless or fraudulent trading by the company or the corporation. It is imperative that you enter into a written agreement with your partner that gives the survivor the right to purchase the interest of the deceased in the partnership. In addition, you would be well advised to take out life insurance policies on the lives of each other to enable the survivor to fund the purchase from the estate of the deceased partner. Furthermore, the partnership insurance policy should provide the necessary cash to make a purchase in the event of one of the partners becoming permanently disabled and unable to discharge his/her duties and functions in relation to the partnership on a permanent basis. The partnership agreement also assists in the case of conflict resolution and voting rights by the partners. The agreement could stipulate how the partners could vote on certain matters, what their percentage voting rights would be, who would hold the casting vote, and how, if a stalemate is reached, the conflict or vote could be resolved. In some instances, it may be preferable to refer in the agreement to arbitration and / or mediation and who would fulfil this function. Bearing in mind that this function must definitely be fulfilled by an independent party to all partners. The agreement would also detail how the profits of the partnership would be split. It could be based on objective criteria for example, based on percentage of voting rights, or it could be based on subjective criteria, for example, performance. If based on performance, the partnership would have to implement rating criteria, evaluation policies and procedures and could include an independent third party to assist with this function. The agreement would also need to stipulate conflicts of interest, and how these would be resolved. The partners need to determine in the agreement whether each individual partner has a right to either vote on a contract that he or she is interested in, and whether each partner would be permitted to go into “competition” with the partnership or have relationships with entities that could be seen to cause a conflict of interest. |