The Importance of a Shareholder’s Agreements

Written by Vince Pignalosa

What is a Shareholder Agreement?

A shareholder agreement is a type of contract that defines the relationship between the shareholders of a company and how the company will operate.

Whereas a company’s constitution is a contract between the company and its shareholder and directors. 

Why are Shareholder Agreements Important?

A shareholder agreement is important as it protects the interests of the shareholders and the company and reduces the risk of disputes or confusion.  It allows the shareholders and directors of the company to customise the governance and operation of the company according to the needs of the shareholders.

A shareholder agreement generally covers more specific matters that would not be addressed in a company constitution, such as dispute resolution, exit strategies for shareholders or even how shares are to be valued.

A shareholder agreement can be drafted to either override or supplement a company’s constitution, so long that it does not conflict with any requirements set out in the Corporations Act 2001 (Cth).  Whereas a company’s constitution is a ‘public’ document and is lodged with the Australian Securities & Investments Commission (ASIC), a shareholder’s agreement is a private document between the shareholders of the company and does not need to be lodged or registered.

A benefit of a shareholder’s agreement is that it can be easier to amend than a company’s constitution as the shareholders can agree to the process and requirements to amending the agreement.  However, a company’s constitution will generally require a special resolution of at least 75% of voting shareholders.

What Should you Include in your Shareholder Agreement?

What to include in your shareholder agreement will be dependent on a host of factors and includes but is not limited to considerations about the nature of the company’s business, the sophistication of the shareholders and directors, the nature of the relationship between the shareholders and the size of the company’s business.

Some key issues that all shareholder agreements should consider are:

• Purpose and Objective. What is the purpose and objective of the company and shareholders?  Have the shareholders and company prepared a business plan?  Is it the objective of the shareholders to operate the company for long-term growth or operate the company with a view of selling the company once certain key performance indicators are met?
• Funding. How will the company be funded?  Will the shareholders be required to inject capital into the company equally?  What will be the terms (if any) of shareholder loans, how will new shares be issued and do existing shareholders have a first right to acquire any new shares?  Importantly, what requirements will the company have when issuing dividends?
• Management. What rights will shareholders have in appointing and removing directors?  Will each shareholder have a right to appoint their own director? What matters can directors decide vs what matters will require the consent of the shareholders?
• Exit. What will be the exit strategy for the shareholders?  How and when can a shareholder transfer their shares in the company (e.g., voluntary transfer, transfer of death)?  Will there be an agreed method in valuing shares in the company?  What rights will an exiting shareholder have to tag along or draw along other shareholders on their exit?
• Disputes. What mechanisms will be in place to deal with disputes between shareholders?  How will deadlocks between shareholders, breaches of the shareholders agreement or termination of the shareholders agreement be dealt with?
• Restrictions. Will the shareholders require any restrictions on shareholders in carrying on a business similar to the company?  Will the remaining shareholders require exiting shareholders to agree to a non-compete upon their exit?  How will confidential information and intellectual property be dealt with on the exit of a shareholder?

What to do next?

A well drafted shareholders agreement will help outline shareholder interests and rights in relation to the running of the company and will in many instances help prevent or resolve conflicts, while facilitating the growth of the business.

For more information and guidance on drafting a shareholder agreement, please do not hesitate to reach out to one of our commercial lawyers.