Do You Need A Shareholders Agreement?

A shareholders agreement is a binding contract between the shareholders of a corporation that defines the shareholders’ rights, privileges, protections, and obligations.

The shareholder’s agreement coexists with the corporations’ articles of incorporation and bylaws. The purpose of a shareholders agreement is to go further into detail with the businesses functions.

Even though there is no legal requirement for companies to have a shareholders agreement, it is extremely beneficial for every company with more than one shareholder to have one.

Having a shareholders agreement will save both, shareholders and a company money in the long run because it will reduce the potential for conflict between shareholders, and will assist the company to be run smoothly.

If you have a company and you currently don’t have a shareholders agreement, don’t worry – this can be remedied.

A shareholders agreement can be entered into at any stage in the business’ life without the need to change the company constitution. Shareholders and the overall viability of a company will benefit from the use of a shareholders agreement.

Provisions included in a shareholders agreement

Generally, the provisions of a shareholders agreement regulate the company’s matters. These matters include:

  • The company structure: this includes the composition of the share capital of the company.
  • The company’s principles: the principles upon which the shareholders or partners in an agreement agree to run their business.
  • The appointment and removal of directors: this includes the provision of the existence of shareholder, for certain important matters, or the existence of specific majorities for the adoption of certain decisions, restriction on the powers of the Board of Directors, etc.
  • Shareholding restrictions and the transfer of shares: this includes the provision of prohibiting transfers of shares or interests in shares, except in certain circumstances, the procedure of transfer of shares and procedures of calculating the fair value of the shares.
  • Resolution of deadlock situations: this includes a decision-making process in order to overcome deadlocks.
  • Sufficient regulation of the rights of entry, or exit of shareholders: a provision to assist the addition or exiting of parties to the company.
  • Restrictions on the activities of the company: a provision with limitations of shareholders and business functions.
  • Greater protection: the parties can achieve greater protection, of the rights of minority shareholders.
  • The duty of shareholder to act bona fide: includes the provision (either express or implied) which imposes duties on shareholders to act in good faith, when exercising their voting powers.
  • Business Plan of the Company: includes provisions that contain obligations of shareholders for additional funding, the nature of the business of the company, the scope of its activities.
  • Dividends: This provision specifies the number of profits to be allocated to shareholders, each year.
  • Access to records and financial documents: provisions which give the shareholders rights to access the company’s records, financial statements.
  • Non-Competition: includes provisions preventing shareholders from setting up a business to the Company, within a prescribed time period, or territory.
  • Confidentiality: includes the provision of confidentiality for example provisions relating to the exposure to publicity of the Company’s documents.
  • Dispute Resolution and applicable law: includes provisions of reference when disputes arise.

Because the Shareholder’s Agreement has the additional benefit of not being available to public eyes, unlike a company’s constitution, details which may be sensitive, such as the role of the parties in the Company’s management, in their rights and obligations, may be set out in the Shareholders Agreement.

A shareholders agreement should include the following (however, is not limited to):

  • The types of shares
  • The rights of shareholders in relation to the type and percentage of shares they own
  • The division of dividends (taking salary payments into account)
  • The voting rights of shareholders (depending on the type and percentage of shares they own)
  • Actions that require the consent of shareholders
  • A procedure is in place for when voting is deadlocked
  • Whether shareholders can also be company employees
  • How new shares are allocated
  • The valuation of shares
  • The liability of shareholders when the company is in debt
  • Confidentiality

Here at Butlers Business and Law, we can help you with preparing a shareholders agreement that best reflects the intentions of all shareholders in your company.

Please don’t hesitate to contact our professional solicitors on (02) 4929 7002 or fill an enquiry form out on our website https://butlers.net.au/contact/ .

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