A management agreement is an agreement between a company and its investor, partner or other individual to manage the company. A management agreement typically includes clauses that extend beyond normal Limited partnership agreements or shareholding agreements. It has many benefits for both parties and should be adhered to as much as possible. It reduces ambiguity, provides guidance to both sides, sets expectations on behalf of the company and its manager, provides reasoning behind why certain decisions are being taken by the company or its principal, and much more.
Scope of the Agreement
The Scope of the Management Agreement should include a section that describes the types of activities the manager will perform in the company.
This section should include a brief about specific duties, such as in-house and operation decisions, negotiating contracts, marketing, buying and selling certain non-current assets such as vehicles, computers and other operational equipment.
The Scope of the Management Agreement should also include a list of general duties that are implied by entering into a management agreement. These include but are not limited to:
acting in good faith and fidelity to protect the interests of the group;
performing any services with due diligence and in accordance with industry standards;
consulting with the group regarding decisions made on its behalf; and
acting in a manner consistent with other agreements which have previously been entered into between the company and other third parties (such as agreements executed by previous managers).
Duties and Responsibilities
This clause sets out the specific duties and responsibilities of the Manager, including the details of what was previously briefed. I.e., here we will mention who is responsible for what to avoid any misunderstandings or disputes between the parties about who is responsible for what.
The duties and responsibilities of a manager can be very broad and include:
the day to day running of the business;
the hiring, training, supervising and dismissing of employees;
interacting with clients, customers, suppliers and contractors;
buying stock;
borrowing money on behalf of the business;
marketing and advertising;
arranging insurance cover for risks related to the operation of the business;
preparing financial statements and reports; and
carrying out any other tasks as required or agreed by both parties.
Obligations of the Company/ Owners
The Company/ Owners have several essential responsibilities in a management agreement. The company must provide the manager with a considerable amount of confidential information and business secrets necessary for running the business and provide a clear explanation of the work that needs to be done. (Most business agreements should be attached to a Non-Disclosure Agreement).
The company may also be required to pay several expenses directly rather than through the manager—for example, the maintenance of the owned property, which the company constitutes a part of it.
Compensation
The management company will typically set the compensation for the manager. However, it is important to explain this in the Management Agreement.
There are a few reasons for this:
- The other investors need to know what the manager is getting paid.
- The investors may have different opinions about what is fair compensation for a manager, and they will want to know if it is out of line with their expectations.
- If the investors believe the compensation is too high, they might refuse to sign the agreement before it is changed.
- If there are multiple managers, putting the compensation in writing makes it easier to determine how much each should receive.
Removal of Manager
The company may allow managers to be removed by a majority vote at a shareholders’ meeting. Alternatively, AIO Legal Services could draft a different clause that requires that 75 percent of the stock be owned by one person before he can remove another manager. We could also specify that managers cannot be removed unless there is cause for removal. It is important to know what kind of authority the company has over the managers when entering into this type of arrangement.
Disputes
Set out a procedure for how to deal with disputes between the company/owners and managers. For example, AIO could state that if an owner disagrees with a decision made by management, he must call a shareholders’ meeting within 10 days to vote on whether or not to overturn it.
Overall, it is important to have a Management Agreement that will protect your business and both parties’ interests. You can’t just hire someone to run the business without having some sort of agreement in place. Doing so would open you up to all kinds of liabilities, not to mention the fact that it doesn’t give you a clear idea of what your employee’s responsibilities are. A good Management Agreement will reduce the future risk of conflicts and confusion in the company. Many business owners don’t realise how important Management Agreements are until they’re embroiled in a dispute. That’s why you need AIO Legal Services on your side to draft your Management Agreement: we’ll make sure you’re protected, no matter what happens. Whatever challenges your business may face down the road, we’ll be there with you to help you navigate them every step of the way.