July 4, 2013

Why Shareholder Agreements Matter

If your company has more than one shareholder, you need a shareholder agreement.

WHAT IS A SHAREHOLDER AGREEMENT

A shareholder agreement is a contract that regulates the obligations and rights of members of a company. It provides an important mechanism for governing issues not catered for in the company’s constitution or the Corporations Act.

Amongst other things, shareholder agreements cover:

  • exit strategies for members (i.e. agreements to sell shares on particular occurrences like an acquisition offer or on the death of a founder);
  • how company directors are appointed and removed;
  • the requirements and conditions of any shareholder loans;
  • the dividend distribution policy for profits of the company;
  • restrictions on competition with the company; and
  • how shareholders are obligated to spend time on company activities.

WHY SHAREHOLDER AGREEMENTS ARE A GOOD IDEA

Disagreements between reasonable people are usually caused by misunderstandings – disputes between the founders of technology businesses are a leading cause of failure.

The most important function of a shareholder agreement is to prevent disagreement. The process of drafting a shareholder agreement will always uncover important issues that co-founders have not considered (usually based on “what if” scenarios). When these issues are dealt with before there is something large at stake, they are always much easier to reach agreement on.

TAKEAWAY

If your company has more than one shareholder, a shareholder agreement is very important. It is a tool to prevent disagreement between founders.