What is a Shareholders Agreement?
A shareholders agreement sets out the rights and obligations of the shareholders of a company. It's a commercial way of agreeing on rules and procedures for governance in advance and helps avoid future disputes and ambiguities.
Who should consider it?
While not required by law, a shareholders' agreement is essential for companies if they have, or will have, more than one shareholder. Even if your company is not planning to raise capital immediately, it is important that a shareholders agreement be implemented as soon as it appears that there may be more than one shareholder.
Whether your company will benefit from a Shareholders’ Agreement will depend on many factors, including where your company is at in the corporate lifecycle.
For example, companies with a Sole shareholder that sit in the start-up phase are unlikely to see the benefit of implementing a shareholders’ agreement. However, if you’re in the growth phase, and looking to bring external investors on board, it would be the opportune moment to implement a shareholders’ agreement as it would return real value. But before we go too far, what is a shareholders’ agreement, and why do you need one?
When to put a Shareholders Agreement in place?
Put a Shareholders Agreement in place when you first incorporate the company and all parties are keen to work together. Later on, circumstances may change, and resentment may build between shareholders as the problem of life and business may cause some shareholders to become less than supportive of the business direction and management approach.
It is, however, never too late to build a Shareholders Agreement.
How is a Shareholders Agreement different from the Company Constitution?
A shareholders’ agreement allows for clarity around the rights, responsibilities, and processes available and expected of members and the board.
- A Constitution contains information about the day-to-day, administrative matters of the company, including share class permissions, whether the replaceable rules under the Corporations Act apply, and whether the company can coordinate resolutions by way of circular resolution, as opposed to having to meet and resolve decisions in person.
- Whereas a shareholders’ agreement governs the relationship between shareholders, the board of directors, and the company. It also outlines processes and mechanisms available to shareholders and Directors. This includes processes relating to the power to replace directors, the transfer of shares to third parties, mergers and acquisitions, and shareholder disputes.
While there may be some overlap in the general topics covered in the constitution and shareholders’ agreement, the shareholders’ agreement is much more detailed in outlining the specific processes, mechanisms, and relationships of the members of a company.
Plan today to avoid unnecessary disputes tomorrow
Regardless of whether members are friends and or family, a well-drafted shareholders’ agreement can avoid potentially costly disputes by ensuring all shareholders are on the same page, are aware of their rights and obligations, and sets out processes and procedures for dispute resolution.
Common clauses addressed in Shareholders’ Agreements
The specific clauses and processes drafted into a shareholders’ agreement are specific to each company and its unique circumstances. Thus, it is beneficial that the clauses are drafted by an experienced corporate legal advisor to ensure that all of the clauses appropriately reflect the requirements of each of its members, including minority shareholders while remaining compliant with ASIC and the Corporations Act.
Eight benefits of a Shareholders Agreement
A tailored Shareholders Agreement;
- Outlines the basis for important decision-making and restricts the power of directors where necessary
- Protects the owners, directors and the company against the actions of others
- Minimises business disputes between owners – makes it clear how decisions are made and provides dispute resolution
- Assists in getting bank finance – shows stability to potential partners
- Prevents changes in one shareholder’s personal circumstances from affecting the company or other shareholders
- Protects the rights of minority shareholders and the investment value of their shareholding
- Lists and sets out procedures if a shareholder decides to sell their shares
The Shareholders Agreement need to address:
- Share splits and types of share
- Voting rights of shareholders
- Actions that require shareholder consent
- Shareholders when they are also company employees
- Pre-emptive rights for the transfer of shares
- New shares
- Share valuation
- Shareholder liability when the company is in debt
- Share disposal
- Confidentiality
How we can help
A Shareholders Agreement is an important part of protecting your business and your family, from the business.
- We can supply this legal document.
Contact us for a confidential chat about your needs.
Related: Key Legal Documents for Business Owners
- Non-Disclosure Agreements (NDA)
- Company Power of Attorney (CPO)
- Partnership Agreements
- Shareholders Agreement
- Unitholders Agreement
- Loan to Company Agreement
