A Shareholders Agreement is a written agreement between the shareholders of a company. It is a common practice in closely held private companies. These companies are usually proprietary and limited by shares (Pty Ltd).
WHAT IS A SHAREHOLDER AGREEMENT?
A Shareholder Agreement is a document that touches base on a broad variety of topics that are necessary for the day to day running of a company. These include funding, structure, management, and the direction of the business. In discussing these topics the agreement also turns attention to the responsibilities and obligations of the business owners and provides an opportunity to discuss and resolve issues before they arise.
HOW DO I ENSURE MY SHAREHOLDER AGREEMENT COMPLIES WITH AUSTRALIAN STANDARDS?
Shareholder Agreements are not regulated by statute law but are instead considered to be an area of contract law. Contract law is governed by common law principles, and as such Shareholder Agreements are analysed through these.
This is a great benefit to business owners as it means that their agreement does not need to comply with a set procured or form. Therefore it can be tailor made for each individual company. However, you must be careful to ensure that your agreement is drafted in a manner which ensures the agreement entered into is both valid and enforceable at law. This is where we recommend you seek legal advice. Here at Lynn & Brown, our team specialises in commercial dealings and can assisting you in drafting a Shareholder Agreement that is both fair and enforceable.
WHAT CAN I PUT IN MY SHAREHOLDER AGREEMENT?
Once you have decided to draw up a shareholder agreement, you must turn your mind to the topics that you wish to include.
Some common themes across most shareholder agreements are:
- The structure of your management: business runs smoothly when everyone has a part and everyone knows their job. Shareholder agreements can cover aspects such as: the rights of shareholders to remove and appoint new directors, the circumstances in which a director may be removed and the powers awarded to management and directors.
- Director and shareholder meetings: in order for meetings to be productive and non-confrontational there should be clear regulations regarding the attendance and conduct of shareholders during meetings. This can include how and when meetings are arranged, quorum requirements and means of determining large decisions such as debt or purchasing or disposing of significant assets.
- Class rights: the power attached to different classes of shares in the company.
- Accounts, funding and dividends.
- Contracts with the company, non-competes and confidentiality: this includes the terms upon which shareholders or their nominees may be empower of have contractual dealings with the company.
- Powers to run the company’s business, rights to make purchases for the company and enter into contracts for the company.
BENEFITS OF HAVING A SHAREHOLDER AGREEMENT
There are many benefits to a well drafted and thoroughly consulted Shareholder Agreement. Not only does it force the parties to consider what procedures the company and its shareholders will follow; if prepared at the commencement of the company it allows shareholders to address critical issues from the start as opposed to when they arise.
By bringing attention to possible areas of concern, shareholders are able to avoid or minimise disputes by determining early dispute resolution procedures and controls of unplanned expenditures, indebtedness and other outgoings.
Finally, shareholders, managers and directors may not wish to stay with the company forever. By having clear exit and re-election methods in place, the company reduces the chance of unwieldy leadership and rapid changes.
Each business is different from the next, so there is no “one size fits all” policy when it comes to preparing your Shareholder Agreements. Here at Lynn & Brown, we will learn more about your business and the direction you wish to take before creating a tailored agreement to suit you. If you are creating a business or decide that some clearer direction is needed, it is never too early or too late to bring the predictability and order found under Shareholder Agreements.
About the authors:
This article has been co-authored by Haley Graydon and Steven Brown at Lynn & Brown Lawyers. Haley is a law clerk and is in her final year of study at UWA. Haley has a keen interest in is family law and estates. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.