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Do I need a Shareholders Agreement?

May 15, 2018

A shareholders agreement set out the rights and obligations between the parties to the agreement including the company shareholders and often the company itself.

 

How does a shareholders agreement differ to the company constitution?

 

The main difference between a shareholders agreement and a company constitution is that a shareholders agreement is created and governed by contract law whereas a company constitution is largely regulated by the Corporations Act 2001.

 

The Corporations Act allows for a company constitution to be amended by shareholders holding 75 percent or more of the voting rights while a shareholders’ agreement will generally only be varied with the consent of all parties.

 

Careful consideration must be given in the drafting process to ensure the company constitution and the shareholders agreement are consistent.  Any inconsistency between the documents can lead to a dispute.

 

Do I need a shareholders agreement?

 

At the time of the formation of a company there is usually a positive and optimistic environment with a view to the opportunities available to the new venture. 

 

This is an ideal time for the preparation of a shareholder agreement when relationships between the parties are strong and allows for the discussion of a number of scenarios.  As well as positive scenarios,the founder shareholders should consider scenarios involving when things go wrong, a worst case scenario.  While disputes may appear unlikely at this stage the establishment of a framework to deal with disputes is an investment that fosters valuable discussion on the operation of the company and may reduce the time and expense of any disputes at a future point in time.

 

Shareholder agreements are also useful to protect the interests of minority shareholders.  In the absence of a shareholders agreement, the majority shareholders usually control most decisions of the company.

 

What should be included in a shareholders agreement?

 

At a basic level a shareholders agreement should address:

 

Management of the company

How the company will be structured and managed including the appointment of directors. 

 

Decision making

Careful thought should be given to identifying the threshold level of consent required for decisions on various topics.  Unanimous consent may be required for critical matters, a special majority may be required for important matters and a simple majority in the case of routine matters.

 

While a cautious approach may lead to high vote thresholds for decisions, attention should be given to ensuring that the voting requirements are not too cumbersome so as to prevent the effective operation of the business.

 

Share transactions

 

A regime should be included for the acquisition of newly issued shares by existing shareholders and third parties and the terms on which shares may be transferred to existing shareholders or third parties.  The shareholders agreement should also establish the basis of valuing new or existing shares which may involve a prescribed valuation methodology or an independent valuation.

 

Financial

 

Funding of the company may be by equity, loans or convertible instruments and will typically cover the costs of incorporation and provide sufficient funds for initial operations of the company.  Allowance may also be made for additional funding in the future.

 

Any profits of the company should be dealt with by the company’s distribution policy as set out in the shareholders agreement.

 

Termination and exit

 

The shareholders agreement will also specify events leading to termination and how that process should occur. 

 

Shareholders may also seek to exit the company and because of the difficulties of selling a shareholding which represents partial ownership of the company, there may be requirements or rights for other shareholders to participate in the sale of their shareholdings. 

 

Certain triggers may also require the divestment of shares such as no longer being an employee of the business, death, incapacity or moving from the geographic area in which the company trades.

 

Dispute resolution

 

In the event of a dispute between shareholders, a clear dispute resolution process will facilitate a speedy and efficient resolution.

 

 

What should I do next?

 

The process of negotiating, finalising and signing a shareholders agreement fosters the discussion of issues which should distil the strategy and operations of the company and in turn reduce the chance of disputes in the future.  The final shareholders agreement is the end product of this process however the greater value is often found in the discussion during the agreement’s formation.

 

Disclaimer

Opportuna Legal communications are intended to provide commentary and general information. They should not be relied upon as legal advice. If you would like further information in relation to this matter or other legal matters please contact Opportuna Legal.

 

 

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