Why is a shareholders’ agreement valuable? How can it protect you and the future of your company?

A shareholders’ agreement is a contract between the shareholders of a company that addresses the management and sets out the rights and obligations between shareholders.  

However, it is not a one size fits all document.  A shareholders’ agreement should be tailored to the specific needs of the company, its business and the shareholders. 

A shareholders’ agreement addresses several important matters that can arise during the life of a company:

  • Exit strategies for the shareholders, such as the agreement to sell shares on particular occurrences like the death of a founder or an offer to acquire the company.
  • Expectations of working owners.
  • How company directors are appointed and removed.
  • Voting rights of both the directors and shareholders. Generally, the directors control the day to day operations of the company. However, there may be certain critical business matters that requires all shareholders (or shareholders who together hold a particular percentage of the company’s share capital) to decide on that matter.
  • The dividend distribution policy for profits of the company.
  • The requirement and conditions of any shareholder loans.  
  • The restrictions on competition with the company.
  • A dispute resolution procedure in the event that a dispute arises between the shareholders.

Some specific matters that should be considered:

  • What occurs in the event of a voting deadlock? For example, a particular director having a casting vote in addition to their deliberate vote, or a third party referee (such as the company’s accountant) who may make recommendations on decisions.
  • Do the key roles of each individual key person need to be specifically set out in the agreement? This may avoid disputes in the future.
  • Does the absence from ordinary work or performance of key roles (without consent) trigger an automatic sale of shares? What happens if someone just ups and leaves?
  • Does there need to be any carve outs to the restriction on competition? For example, if a shareholder already has interests in existing businesses.
  • Should the agreement cater for business succession? For example, if a shareholder dies or suffers permanent disability, ensuring that the surviving shareholder avoids having to work with a member of the deceased shareholder’s estate. This involves taking out insurance but also vendor finance provisions in the event insurance policies are unable to be taken out or the proceeds are not the equal to the fair market value of the shares.
  • Are there any employees who are, or potentially considered to be, shareholders? If so, the agreement should include ‘bad leaver’ provisions which automatically trigger a sale of the employees shares if they voluntarily resign or their employment is terminated within a certain period of time. This is to ensure the employee shows a specific level of commitment to the company before ‘crystalizing’ their equity.

Takeaway

A shareholders’ agreement is an extremely valuable document protecting the interests of shareholders and the future of a company. It outlines the rights and obligations of the shareholders and key persons, and if drafted appropriately, can avoid costly disputes in the future and ensure the continual efficient operation of the business. It is a no brainer.

Please contact Rouse Lawyers on 07 3648 9900 if you wish to discuss preparing or reviewing a shareholders’ agreement.

By Peter Rouse & Sonja van der Steen

Please contact Rouse Lawyers on 07 3648 9900 if you wish to discuss preparing or reviewing a shareholders’ agreement.