What is a Shareholders Agreement?

A Shareholders Agreement is a contract between the shareholders. It protects the shareholders’:

a) relationships between each other
b) other business arrangements
c) rights
d) responsibilities, obligations and liabilities
e) interests

A Shareholders Agreement is a binding contract between the shareholders. It sets out their rights, obligations, and the procedures. This is in case there is a shareholder dispute in the future.

Doesn’t the company already have a set of rules?

When you incorporate a company it is governed by the:

a) company constitution
b) Corporations Act 2001 (Cth)
c) common law

The company constitution is a ‘contract’ between the company and the shareholders. In contrast, a Shareholders Agreement is a binding contract between the shareholders.

A Shareholders Agreement protects everyone?

What if the shareholders are in agreement as to how to treat the investments or how to run the business? Then a Shareholders Agreement is a must. A Shareholders’ Agreement provides:

1. how the company is run
2. responsibilities of the shareholders
2. clarity and certainty
3. reduced conflict between shareholders
4. protection of shareholder rights if a conflict arises

Constitution vs Shareholders Agreement

A Shareholders Agreement is a contract. You are only bound by a contract if you sign the contract. In contrast, a constitution automatically applies to shareholders and directors. New shareholders and directors are automatically bound by the constitution. They are not bound by the Shareholders Agreement. New shareholders must sign the Shareholders Agreement to be bound.

The Legal Consolidated Barristers & Solicitors Shareholders’ Agreement requires an outgoing shareholder to required the new shareholder to sign the Shareholders Agreement. This is a deed of accession.

Shareholder Agreement vs Business Succession Plan

You need separate agreements for each of these situations:

1. A Shareholders Agreement is a contract between the company and the shareholders. It overrides a company Constitution. It details how the company is managed. (It is similar to a Unit Holders Agreement.)

2. A Business Succession Plan is an agreement to get rid of the disabled or dead owner with some money. The outgoing owner gets some money and the remaining owners get his interest in the business. A BSP does nothing to help the business itself. The business may well fold after the person leaves, but at least his wife gets some money and the remaining owners get the business. A BSP is usually funded by life, TPD and trauma insurance.

3. Key person insurance agreement is insurance paid to the business if a key person is disabled or dies. This does not deal with how to get the shares off the outgoing owner. Key person insurance just helps the business. Key person insurance is usually to repay debt (often secured by the outgoing owners’ home) or cover the cost of training up a new person.

Put a Shareholders Agreement in place early

Put a Shareholders Agreement in place when you first incorporate the company. Later on, circumstances may change. Resentment may build between shareholders.

Agree on the rules and procedures for governance in advance. Building a Shareholders Agreement helps avoid future disputes and ambiguities.

It is, however, never too late to build a Shareholders Agreement.

Eight benefits of a Legal Consolidated Shareholders Agreement:

1. Tailored shareholder protection
2. Outlines the basis for important decision making and restricts the power of directors where necessary
3. Protects the owners, directors and the company against the actions of the others
4. Minimises business disputes between owners – makes it clear how decisions are made and provides dispute resolution
5. Assists in getting bank finance – shows stability to potential partners
6. Prevents changes in one shareholder’s personal circumstances affecting the company or other shareholders
7. Protects the rights of minority shareholders and the investment value of their shareholding
8. Sets out procedures if a shareholder decides to sell their shares

The Shareholders Agreement includes:

The Shareholders Agreement protects:

1. share splits and the types of share
2. voting rights of shareholders
3. actions that require the consent of shareholders
4. shareholders when they are also company employees
5. pre-emptive rights for the transfer of shares
6. new shares
7. share valuation
8. shareholder liability when the company is in debt
9. share disposal
10. confidentiality

Need help building the Shareholders Agreement?

For legal advice telephone us. We are a law firm. We can help you answer the questions.

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
Australia wide law firm
Mobile: 0477 796 959
National: 1800 141 612
Email: brett@legalconsolidated.com