The Corporations Act provides some basic safeguards for shareholders. These safeguards are provisions that require the directors of a company to act in good faith and in the best interests of the company.
The Corporations Act also provides that a set of rules, known as the “Replaceable Rules”, apply to private companies in certain circumstances. These “Replaceable Rules” will apply to your company if it was registered before 1 July 1998 but it has repealed its constitution since that day, or it was registered after 1 July 1998.
These rules deal with matters relating to the company’s officers and employees, inspection of the company’s books, the company’s director’s and shareholders meetings and the issue and transfer of shares.
A table of replaceable rules can be found in the Corporations Act at s141.
The rules do not apply if they have been displaced or modified by the company’s constitution.
A company can adopt a Constitution either on or after registration of the company. A Constitution can be a useful document for regulating company, director and shareholder relations.
…and it is the means by which a company can displace or modify a Replaceable Rule
However, unless a Constitution is customised, its value is limited. Most company constitutions are not customised and therefore provide nothing more than a basic rule book.
A Shareholder Agreement can be entered into on or after registration of the company. The Shareholder Agreement’s value is in its ability to be customised so as to address matters that the Corporations Act and the Constitution do not address.
Fundamental provisions in a Shareholders’ Agreement deal with:
The term of the agreement
The process for issuing shares
The process for the transfer of shares on retirement, death, incapacity or bankruptcy
Share valuation method
The appointment of directors
Director and shareholder meeting rules
Decisions over which one or more shareholder has a right of veto
Decisions requiring a special majority
Dividend distribution policy
The Company’s bank
The Company’s accountant
Defining what is a default (assigning interest; sole dissenting shareholder on three or more votes; convicted of criminal offence; guilty of misconduct)
Consequence of default
Dispute resolution clause
The Shareholder Agreement taking precedence over the company’s Constitution
A clause that allows for any unlawful term to be severed
A clause that excludes pre-agreement negotiations
A clause that confirms the parties’ authority to enter into the agreement
A clause that defines the governing law and jurisdiction
More sophisticated clauses in a Shareholders’ Agreement deal with:
Incorporating a business plan
Incorporating a marketing plan
Requiring a majority shareholder to include minority shareholders in any sale to a third party buyer
Requiring minority shareholders to have to sell with a majority shareholder to a third party buyer