Your company is governed by its constitution that is put in place when the company is created. This, however, does not set out the rights and responsibilities of the shareholders of the company. A shareholders agreement will do this as well as provide the foundation of governance for the shareholders and outline what a shareholder can and cannot do.
This essential legal document outlines the rights, obligations, and relationships between shareholders and directors, ensuring that everyone’s interests are protected. In this article, we will explore the reasons why a shareholders agreement is beneficial from all perspectives, who it applies to, and the various circumstances in which you need one.
What is a shareholders agreement?
It is an agreement that sets out the rights and obligations of shareholders and governs the control and management of the company both by its shareholders and directors.
Shareholders agreements provide a well-considered structure for the company’s operations and establish clear guidelines for shareholder responsibilities. This clarity fosters consensus-driven decision-making and minimises the likelihood of disputes among shareholders. Consequently, the company benefits from a smoother, more profitable management process.
Why do you need a shareholders agreement?
Whether you’re a minority or majority shareholder, having a shareholders agreement offers numerous advantages:
It safeguards your interests as a shareholder.
It ensures all shareholders have a mutual understanding of the venture and business.
It provides clarity regarding the extent of your rights and obligations.
It serves as a single reference point for determining shareholder rights and obligations.
It allows for deviations from the default legal position.
As a minority shareholder, you may seek specific provisions in the agreement, such as ability to appoint a director, receiving minimum information rights, and having a tag-along option when larger shareholders sell their shares.
On the other hand, as a larger shareholder, you may want a first right over other shareholders’ shares, assurance that minority shareholders won’t hinder decision-making, and the ability to drag along other shareholders in a sale.
A shareholders agreement effectively addresses these concerns and ensures a smooth business operation.
What clauses does a shareholders agreement contain?
Every company and its objectives are unique, and accordingly, shareholder agreements differ to mirror the conditions of the company and the agreement of its shareholders.
Some of the usual provisions should be as follows:
The shareholders’ agreement should outline the rights of shareholders to appoint directors, if applicable, and define situations in which they might lose that right (e.g., if their shareholding falls below a certain percentage). Additionally, the agreement should include provisions preventing one shareholder from removing a director appointed by another shareholder.
Management and how decisions are made
There should be provisions that set out how the day-to-day, quarterly, and annual management of the company is going to occur as well as the directors and shareholders obligations in regard to this. Particularly, the shareholders agreement should specify what decisions require either a majority (50%), special (75%), unanimous (100%) or other approval.
This is an important area to ensure it is covered in the shareholders agreement, for many reasons. Particularly it allows for:
clear expectations for profit distribution and how that decision is made
protects minority shareholders from exclusion from profit distribution
provides flexibility from the default provisions set by law; and
allows customisation to suit the company and allows for tax planning for shareholders as they have more certainty on dividend distribution.
Transfer of shares
Arguably one of the most important provisions in a shareholders agreement is how and when can shares be transferred.
The shareholders agreement should contain clauses that protect both majority and minority shareholders by establishing pre-emptive rights, tag-along rights, or drag-along rights, or other similarly named clauses that broadly provide for circumstances under which certain shareholders may require other shareholders, or are required by other shareholders, to participate in a sale to a third party.
Shareholders may also consider whether a shareholder must transfer their shares if they no longer participate in the management/operations of the company, and if so, whether all or some of their shares are transferred and at what value.
These provisions help shareholders retain control of their investments and avoid unfavorable situations when shares are transferred.
This allows for an agreement between the shareholders as to what is to occur if one or more shareholders want to exit the company. It could detail whether a buy-out is an option, and if so, at what price, or whether the company or a portion of it is to be sold. This agreement could even establish the share value or provide a method for determining the value of these shares if a shareholder decides to exit.
Access to Information
The shareholders agreement should clearly provide the rights that shareholders have to access the company information and financial reports so that shareholders are made aware of what they are entitled to. This becomes even more important if you are a minority shareholder or a shareholder unable to appoint a director.
Deadlocks and disputes
A key aspect of shareholders agreements often relied upon involves provisions for deadlocks and disputes. It is crucial to clearly outline the steps to be taken in case of a disagreement and the method for resolving such issues. Additionally, the agreement should specify the course of action if a deadlock or dispute cannot be resolved.
Each company’s shareholders agreement contains unique clauses and processes tailored to its specific circumstances. Therefore, it is advisable to have an experienced commercial lawyer draft the clauses, ensuring they accurately represent the needs of all members, including minority shareholders, while maintaining compliance with ASIC and the Corporations Act.
If you require legal advice about your company or a shareholders agreement you can contact the Business Team at Turnbull Hill Lawyers.