5 Reasons Why Smart Companies Have Shareholders Agreements

Shareholders Agreements are a smart decision during the formation of a new business. A shareholders agreement covers important information such as who can be a shareholder, who can serve on the board of directors and the value of shares of stock. These agreements specify the terms for entry and exit of shareholders from the company. While there is no legal requirement for a company to have a written business agreement, the document is a useful tool to prevent costly disputes when disagreements arise.

There are five key reasons that smart companies have shareholders agreements:

  1. Directors Appointments

A shareholders agreement should specify the shareholder’s right to appoint a director and how they can lose this right. For example, an agreement may specify that the right will be lost when the shareholder’s shareholding drops below a specified percentage. More importantly, the agreement may also include provisions so that shareholders may not remove another shareholder’s appointed director. This is an important tool for preventing uncertainty regarding the lawful appointment and removal of a new director.

  1. Management

The way a company is to be managed should be set out by a shareholders agreement during the formation of a new business. The agreement should outline the responsibilities of each partner or director so that they understand what is expected in this role. This may include required productivity levels expected from partners or directors and the amount of non-chargeable work allowed during work hours. This prevents disagreements as to the expected level of commitment to the company.

  1. Decision Making

The agreement should also outline the amount of votes required to pass certain types of decisions. Importantly, it may provide methods for resolving disputes where a deadlock occurs during the voting process. This may include provisions such as put and call options or possibly the forced ending of a company.

  1. To prevent investment in rival businesses

A shareholders agreement may also contain a non-compete clause to prevent members from investing in rival businesses. This will usually contain a description of the business of the company and how company resources may be used. This is crucial for supporting the financial interests of shareholders in a company.

  1. Exit strategy and Unexpected Exit

The agreement should also outline an exit strategy for members, which may include a buy-out, listing or sale of business. This is important for preventing disputes as to the value at which certain shareholders may exit.

Further, the agreement may set out a plan in the event that a shareholder dies or becomes unable to work due to disability. This is crucial for preventing cash flow issues for remaining shareholders and provides a quick strategy to remove uncertainty for the deceased’s family.

Considering the needs of your business

Depending on the needs of your business, a good shareholders agreement may also consider:

  • the share split and types of shares
  • division of dividends
  • valuation of shares
  • actions that require the consent of shareholders
  • allocation of new shares
  • the liability of shareholders when the company is in debt

Finally, it is important to seek professional assistance before finalising the agreement. Each shareholder should also seek independent legal advice before entering into an agreement to ensure their interests are being protected.

Want to know what a shareholders agreement could do for your business? Please don’t hesitate to contact our experienced Newcastle commercial lawyers at Butlers Business and Law on (02) 4929 7002 or fill out an enquiry form on our website.