Top Tips for Shareholders Agreements

A shareholders agreement is a binding agreement among shareholders which covers important information such as who can be a shareholder, who can serve on the board of directors, the value of shares, and entry and exit of shareholders. While there is no legal requirement for a company to have a shareholders agreement, the document is a useful tool to prevent costly disputes when disagreements arise. When established alongside the company constitution, companies maintain a strong foundation for effective corporate governance. Shareholders agreements bolster corporate governance in the following ways:

Issuing Shares

A shareholders agreement should stipulate the share split, types of shares, valuation of shares, and division of dividends. A shareholders agreement should also list certain actions that require consent of all shareholders. For example, if new shares are issued after company formation, the shareholders agreement should contemplate a Deed of Accession. This is a deed made by the company and signed by all existing shareholders. Including this information clarifies the rights and obligations of shareholders.

Management

The way a company is to be managed should be set out by the 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. Including this information clarifies the rights and obligations of directors.

Attracting Investors

Transparent and effective management builds confidence in potential investors. This can often be signalled through a strong shareholders agreement.

Directors Appointments

A shareholders agreement should specify the shareholder’s right to appoint a director and how shareholders may lose this right. This is an important tool for preventing uncertainty regarding the lawful appointment and removal of a new director.

Decision Making

A shareholders agreement should outline the number 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.

Non-Competition

A shareholders agreement may contain a non-compete clause to prevent members from investing in rival businesses. To do this, the shareholders agreement will usually describe the business of the company and stipulate how company resources may be used. This protects loyalty to the company.

Disposal of Shares

A shareholders agreement should include details on when a shareholder may transfer or sell their shares, and what process they must follow. Often, shareholders agreements stipulate pre-emptive rights, which allows existing shareholders to purchase company shares before they are offered to third parties. This protects and prioritises the interests of existing shareholders.

Exit Strategy

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.

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

Do you have questions about your rights and obligations as a shareholder, or what a shareholders agreement could do for your business? Please don’t hesitate to contact our experienced Newcastle commercial lawyers at Butlers Business Lawyers on (02) 4929 7002 or fill out an enquiry form on our website.