Need a Shareholders Agreement?

Our Adelaide business lawyers have over 23 years of combined experience drafting shareholders agreements to suit the circumstances of investors, company founders, owner-operators, and co-owners. We can also assist with:

• Drafting shareholder agreements;
• Reviewing shareholder agreements;
• Amending & recommending clauses in shareholder agreements;
• Resolving issues by shareholders or directors of a company;
• Advising on share issues and share transfers.
• Drafting buy/sell agreements;
• Employee share schemes;
• Subscription agreements;
• Subscription agreements;

Shareholders agreements are like prenuptial agreements between you, a company and or other shareholders. They can save you a lot of money and headaches in the future – but only if you have one in place. A shareholders agreement’s main purpose is to control the relationship between members of a company (i.e. shareholders) and the directors of a company (who can also be members).

A shareholder is someone that owns at least one share of stock in a company. Stock ownership entitles shareholders to benefit from the company’s earnings and assets. However, they may also share liability if the company owes money or is declared bankrupt.

Having a shareholders agreement in place is a cost effective way to minimize issues that may arise later on by clarifying how certain situations are dealt with. Generally, the rights and duties of shareholders are governed by the Corporations Act 2001 (Cth) (the Act) and the common law (recorded court judgments). The Act, common law, and constitutions of companies, provide basic guidelines about the relationship of shareholders with each other, and with the company they hold shares in. Therefore, it may be wise for shareholders of a company to enter into a shareholders agreement.

A shareholders agreement is more specific and may contain specific clauses that deal with a wide range of issues not commonly found in a company constitution. Both agreements can work together to govern the relationship between key stakeholders with more specific rights, obligations and rules.

Whilst both agreements serve to govern shareholders’ rights and obligations, they deal with different topics depending on the company’s circumstances. The two documents should work in conjunction with each other and need to be carefully drafted to ensure they do not conflict or add uncertainty in circumstances where certainty is the objective. It is good practice to have both a company constitution and shareholder agreement in place because of certain benefits, such as:

• Shareholder agreements are confidential between shareholders and the company whereas the company constitution is a public document.
• Shareholders agreements are contracts and therefore easier to enter into and enforce. They also do not require a special resolution to be effective.

In addition to prescribing fair methods of valuation, shareholder agreements can seek to do various things:

• The liability of shareholders when the company is in debt;
• Regulating the relationship between shareholders that are unconnected with the general administration of the company;
• Confer rights to shareholder that are not enforceable if in the company constitution, such as personal rights conferred on a shareholder other than as a member. This could include rights under a contract of service;
• Provide for compulsory acquisition of shares in certain situations;
• Maintain a particular structure for the company, including recognition of special member categories or rights of key individuals;
• Maintain the balance of power between founding directors;
• Deal with succession issues;
• Preserve confidentiality;
• Protect minority shareholder rights;
• Provide for private dispute resolution, such as arbitration or mediation;
• Contain pre-emptive rights to be offered on new shares, veto rights, buy out options, and guidelines;
• Deal with deadlocks, valuation issues, and procedures;
• Share splits and types of shares;
• The rights of shareholders relative to the type / per cent of shares they own;
• The division of dividends;
• Actions that require the consent of shareholders;
• Whether shareholders can also be employees;
• How new shares are allocated.

Consider the case of a minority shareholder who wants to exit the business and sell their stake in a private corporation. Most of the time, shares in a private company are illiquid (harder to sell because of a lack of willing investors) especially in the case of a minority shareholder. The only willing purchaser may be a majority shareholder who may place a low value on the shares. A shareholder agreement can address this type of situation by mandating a fair method of valuation and course of action to be followed upon the sale of shares.

In deciding whether a shareholder’s agreement is right for you, consider the following:

1. Is there a close correlation between management, the directors of the company and shareholders?
2. Do the shareholders wish to influence the way the company is governed as a result of their shareholding in the company; or
3. Do the shareholders merely have a passive interest in the governance of the company?

As you can see above, the underlying core of shareholders agreements (and why to have one) is the level of control desired, and with control comes protection. Generally, you should enter into a shareholders agreement if your company has more than one shareholder, even if they are friends or family as conflicts may arise between majority and minority shareholders.