Need a Shareholders Agreement?
What is a Shareholder Agreement?
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).
Who is a Shareholder?
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.
Why do I Need a Shareholders Agreement?
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.
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We Draft Tailored Shareholders Agreements For Every Commercial Arrangement
Every business is unique, and shareholders agreements must reflect this by being tailored to specific circumstances. Although you may purchase a template agreement, there is a chance not all potential business scenarios are addressed. This is a risk most small and family business cannot afford to take.
By having a contract in place to structure the relationship amongst the shareholders, each party’s expectations are defined with clear rules. In addition to setting expectations, the law of contract provides a wide array of remedies to shareholders including:
- Injunctions – court ordered legal process restraining an individual or group (for example shareholders or directors) from taking action that otherwise they would, or might take.
- Specific performance – where the court orders a defendant to perform an obligation under a contract.
- Damages – a sum of money awarded by the court for a breach of contract, usually a lump sum award.
Helpful Questions & Answers
When should a company constitution be replaced with a shareholder 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.
What Else Can Shareholder Agreements Do?
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.
How Do Shareholder Agreements Work In The Real World?
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.
Is a Shareholder Agreement Right for me?
n deciding whether a shareholder’s agreement is right for you, consider the following:
- Is there a close correlation between management, the directors of the company and shareholders?
- Do the shareholders wish to influence the way the company is governed as a result of their shareholding in the company; or
- 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.
How Can a Lawyer Help?
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;
- We send you a tailored fixed fee agreement.
- Choose the service and fixed fee that suits you
- Sign the agreement
- Pay the agreed fixed fee
- Work begins on your matter immediately
- Receive confirmation when each checkpoint of your fixed fee agreement is reached.
- Once your matter has concluded and you are satisfied we will close your file.
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