Shareholders Agreement
What is a Shareholders Agreement?
A Shareholders Agreement is a contract between shareholders. It protects the shareholders’:
- relationships with each other
- other business arrangements
- rights
- responsibilities, obligations and liabilities
- interests
A Shareholders Agreement is a binding contract between shareholders. It sets out their rights, obligations, and procedures. This is in case of shareholder dispute in the future.
Doesn’t the company already have a set of rules?
When you incorporate a company it is governed by:
- company constitution
- Corporations Act 2001 (Cth)
- 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 shareholders are in agreement as to how to treat investments or how to run the business? Then a Shareholders Agreement is a must. A Shareholders’ Agreement provides:
- how the company is run
- responsibilities of shareholders
- clarity and certainty
- reduced conflict between shareholders
- 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.
Our Shareholders Agreement requires the new shareholder to sign the Shareholders Agreement.
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 (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. A 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 a new person.
4. A Sale Agreement is when you buy or sell something. You may be buying:
-
- shares in a company (Share Sale Agreement)
- something for your company to own
- a business to put in to the company (so that the company will own the business)
- a business and wanting the vendor (the seller) to work in your company
This Shareholder Agreement is not a sale agreement. And it is not a Share Sale Agreement. You need a separate agreement called a “Sale Agreement”. A Shareholders Agreement is not a sale agreement.
5. You do not put Employment Agreements in to a Shareholders Agreement. If one of the directors is going to work in the business then build an Employment Contract or an Independent Contractors Agreement.
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 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 actions of 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 from 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 protects:
1. share splits and types of share
2. voting rights of shareholders
3. actions that require shareholder consent
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
