In any closely held company or professional partnership, establishing clear governance rules is essential to maintaining stability and ensuring that strategic and operational decisions are made efficiently. A well-drafted partnership or shareholder agreement provides a framework for managing ownership rights, resolving internal disputes, and preserving the long-term viability of the business. The most effective agreements clearly define voting thresholds, identify reserved matters requiring special approval, and outline mechanisms for addressing deadlocks or partner misconduct.
This guide examines the essential governance components of partnership and shareholder agreements, including voting thresholds, reserved matters, tie-breaker mechanisms, capital calls, expulsion for cause, and restrictive covenants. It concludes with a model agenda for the first partner meeting, offering practical guidance for businesses forming or restructuring under California law.
Voting Thresholds
Voting thresholds define the level of approval required for different types of business decisions. Ordinary business matters—such as hiring staff, entering into minor contracts, or approving routine expenditures—typically require a simple majority vote. However, significant actions like admitting new partners, amending the governing agreement, or approving a merger often require a higher voting threshold, such as two-thirds or unanimous consent.
These distinctions protect minority owners from being overruled on fundamental issues while still allowing day-to-day operations to proceed efficiently. When establishing thresholds, it is critical to balance flexibility and protection—ensuring that key decisions cannot be made without appropriate consensus but avoiding paralysis caused by overly rigid requirements. In California, partnership and corporate statutes permit such arrangements so long as they are consistent with fiduciary duties and public policy.
Reserved Matters
Reserved matters are specific decisions that require enhanced approval rights even when other matters can be resolved by a simple majority vote. These often include the admission of new partners or shareholders, the issuance of new equity, or changes to the capital structure. They can also cover significant financial actions such as obtaining major financing, approving asset sales, or entering long-term leases. Other commonly reserved matters involve the dissolution of the business, amendments to governing documents, or changes that could alter the control and direction of the enterprise.
By listing these matters clearly, a partnership or shareholder agreement prevents ambiguity and reduces disputes over authority. In California, these provisions must be drafted carefully to comply with fiduciary obligations, especially when they require unanimous consent or restrict management discretion.
Tie-Breaker Mechanisms
Deadlocks can arise when partners or shareholders hold equal voting power and fail to agree on a major decision. To prevent such impasses from disrupting business operations, tie-breaker mechanisms should be established in advance. One approach involves appointing an independent mediator or arbitrator who can review the issue and provide a binding or advisory decision. Another method is to implement a buy-sell trigger, allowing one partner to offer to buy out the other’s interest at a specified price, with the other partner having the option to either accept the offer or purchase at the same terms.
Some agreements also assign rotating decision authority for certain categories of issues, ensuring that each partner has control over specific matters during designated periods. These provisions help maintain operational continuity and protect the enterprise from prolonged disputes. California courts typically uphold such mechanisms when they are clearly defined and voluntarily agreed upon by the parties.
Capital Calls
Capital call provisions ensure that a business can access additional funding from its partners or shareholders when needed to meet operational or investment obligations. The agreement should specify how capital calls are approved, the amount each owner must contribute, and the timeline for payments. It should also define the consequences for failing to meet a capital call, which may include dilution of ownership, suspension of voting rights, or forced sale of the non-compliant owner’s interest.
To avoid disputes, the process should be transparent and applied uniformly to all partners. The procedures should be documented clearly in writing and comply with California law, which recognizes such provisions as enforceable if consistent with the entity’s governing documents.
Expulsion for Cause
Expulsion provisions allow a business to remove a partner or shareholder whose conduct threatens the integrity or stability of the enterprise. Common grounds for expulsion include fraud, gross misconduct, breach of fiduciary duty, criminal conviction, or violation of licensing requirements. The expulsion process must be fair and transparent, typically requiring written notice, an opportunity for the accused partner to respond, and a formal vote by the remaining partners.
The agreement should also specify how the expelled partner’s ownership interest will be valued and repurchased. California law permits expulsion for cause when the procedure is expressly authorized in the governing agreement and executed in good faith. Because of the potential for disputes, the clause should be drafted with precision and consistent with principles of due process.
Restrictive Covenants Compatible with California Law
Restrictive covenants, such as non-compete and non-solicitation provisions, must be drafted carefully to comply with California’s strong public policy favoring open competition. Under California Business and Professions Code Section 16600, most non-compete agreements are unenforceable. However, limited exceptions exist, such as covenants connected to the sale or dissolution of a business.
Non-solicitation agreements may be enforceable when narrowly designed to protect legitimate business interests, such as preventing partners from soliciting clients or employees after leaving the firm. Confidentiality clauses are also permissible, provided they focus on safeguarding trade secrets and proprietary information rather than restricting competition. A properly drafted partnership or shareholder agreement will balance these legal limitations with the need to protect business goodwill and sensitive data.
Model Agenda for the First Partner Meeting
The first partner or shareholder meeting establishes the foundation for effective governance and collaboration. A well-prepared agenda ensures that essential matters are addressed efficiently and that each partner understands their roles and responsibilities.
The meeting should begin with the call to order and verification of attendance, confirming that a quorum is present. Partners should then elect or confirm officers, such as a managing partner, secretary, or treasurer. The next step is to review and formally adopt the partnership or shareholder agreement, including provisions related to voting thresholds, reserved matters, capital call procedures, and expulsion clauses.
After reviewing the agreement, the partners should adopt operational policies, such as accounting methods, banking arrangements, and internal controls. The meeting should also include a discussion of insurance coverage—covering key personnel, professional liability, and general business risks—and ensure compliance with state registration and licensing requirements.
Partners should then confirm initial capital contributions and establish a process for future capital calls. Regular meeting schedules must be set, along with rules governing notice, quorum, and voting procedures. Finally, the partners should adopt policies on conflicts of interest and confidentiality to ensure adherence to fiduciary obligations. The meeting should conclude with an adjournment, and detailed minutes should be prepared to document all resolutions and discussions.
How Our Firm Can Help You
At Leiva Law Firm, we assist business owners and professionals in developing comprehensive partnership and shareholder agreements that safeguard their interests while ensuring compliance with California law. Our attorneys have extensive experience drafting and negotiating agreements that address voting rights, capital contributions, dispute resolution, and restrictive covenants.
We work closely with clients to design governance structures that promote accountability and minimize the risk of internal disputes. Whether you are forming a new enterprise or refining an existing one, our team will ensure that your agreement provides clarity, fairness, and enforceability.
Contact us today at (818) 519-4465 to schedule a consultation with our experienced shareholder agreement attorney in Los Angeles and learn how we can help you implement a partnership agreement that supports your long-term success.
