For businesses that are growing and putting on other shareholders and directors, a Shareholders Agreement is a must have. If your business is not a company but it a partnership or a unit trust structure, the document would be a Partnership Deed or Unitholders Agreement.
Don’t leave some of the most important and fundamental issues for your business to chance. Consider a company with 2 or 3 shareholders – a typical small to medium sized business scenario…
COMMON PROBLEMS FOR SHAREHOLDERS
Issues that commonly that can affect shareholders include:
- A shareholder sells their shares, leaving you with an unintended business partner;
- A shareholder dies and you inherit an unintended business partner or you have to buy the shares from their estate for more than you ought to;
- As a shareholder, you want out but cannot find a suitable purchaser but the other shareholders won’t buy you out;
- The shareholders don’t have available funds to pay out an exiting shareholder;
- The majority shareholder wishes to run the business one way, but is restricted by a minority shareholder;
- You, as a minority shareholder, are being treated poorly by other shareholders who are running the business with little regard to your interests;
- You wish to sell the company’s business as there is an excellent offer on the table, but another shareholder will not and is jeopardizing the sale;
- You wish to receive dividends from the business, but others want to reinvest the profits.
The aim of a Shareholder Agreement is to bring some certainty to the business relationship so there is confidence in how the business will operate
A Shareholder Agreement tailors the rights and obligations of the shareholders to fit the particular purposes of the company, the nature of its business and the aims and wishes of its shareholders – to help avoid some of the potential problems identified above.
Some factors that should be considered in a Shareholders Agreement include:
- The company’s activities/type of business – its purpose;
- The roles and obligations of the shareholders;
- Who are the directors and how the shareholders can change them;
- Director remuneration;
- Who will manage and control the business day to day, such as a managing director;
- Meetings – how they are called, how they are run, counting of votes;
- How decisions are made by shareholders or the board of directors;
- What types of decisions require a simple majority, special resolution or a unanimous vote;
- Payment of dividends;
- Restrictions on the issue/transfer of shares and calculating the share price;
- How shareholders can exit from the company and on what terms;
- Funding of exits (including death) – buy/sell obligations and personal insurances;
- Restraints on existing shareholders as to company customers etc;
- Insurances to be taken out; and
- How any disputes are to be resolved.
The aim of a Shareholders Agreement is to bring some certainty to the business relationship so that shareholders can have some confidence as to how the company will be run and, if there is a falling out, to provide a mechanism for that falling out to be dealt with, as painlessly as possible.
Ideally, the Shareholders Agreement would be in place from the outset whilst all parties are in agreement in relation to all issues however, they can be documented at any time (provided all parties agree).
Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to starting or buying a business, drafting business documents or any other commercial law matter, contact Craig Pryor on (02) 9521 2455 or email firstname.lastname@example.org.
This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your business needs.