Importance of a Shareholder Agreement
If your company is one of the many Australian businesses charging through their growth phase, then you may be standing at the frontier of your next exciting business venture. As a prudent business owner, you're likely considering how to manage risk as you contemplate bringing external investors into your company landscape — thankfully, a shareholder agreement can help you do just that.
Read on to find out how you can protect yourself and your business from conflicts and disputes once shareholders are brought on board, and how we can help you step confidently towards your new corporate horizon.
What is a shareholders agreement?
A shareholders agreement is a legally binding contract that regulates and governs the responsibilities and rights of shareholders, directors and the company board members. Its importance is highlighted by the protection it provides, notably around the various disputes and conflicts that can arise when your company has two or more shareholders.
What does a shareholders agreement cover?
Being legally binding, the agreement can help avoid, navigate and resolve disputes that occur in relation to:
policies and procedures
confidentiality
appointing directors
dividend distribution
exit strategies
share transfer
management structure
buying, selling or transferring shares
removing shareholders
warranties
reporting requirements
resolving disputes
balancing the power between a majority shareholder and minority shareholders
death of a director
the number of shares each shareholder owns
the classes of shares (e.g. ordinary shares, preference shares, "A" class shares etc.).
What is the difference between a shareholder agreement and the company constitution?
Upon incorporation of your company, you would have received a standard legal document called the company constitution; this differs from a shareholders agreement. There are some general topical overlaps between the two, however, so let's take a look at where a shareholders agreement and constitution differ:
Company Constitution
The constitution of your organisation forms a fundamental part of the governance framework, which sets out particular rights and obligations of shareholders and directors, as well as define their roles and responsibilities. A company's constitution will also contain information about the company's business activities such as administrative matters, share class permissions, dispute resolution methods, as well as whether certain rules under the Corporations Act (such as the replaceable rules) apply.
Shareholder Agreement
On the other hand, a shareholders agreement is much more descriptive in detailing the specific processes and mechanisms of a company, including the relationships of all members. More pointedly, it governs how the company, its board of directors and its shareholders relate to and interact with one another.
The processes around the replacement of directors, third party share transfer, shareholder disputes as well as mergers and acquisitions are strictly documented within the agreement.
Benefits of shareholders agreements
The benefits of a shareholders agreement are undeniable when you consider the severity of the consequences of not having one in place. Without the governance that an agreement provides, there is potential for a company to end up in a deadlock situation. Consider if a dispute occurs, and the shareholders can't come to a resolution on their own — even if it's only a two shareholder situation — the company's control is in neither's hands, and therefore a complete stalemate occurs. Shareholder agreements spell out the exact plan for what happens when things go awry.
Furthermore, the process of developing an agreement in the first place means that potential conflicts can be addressed from the get-go. When drafting shareholder agreements, we often ask questions that prompt consideration of certain hypothetical (but very likely) issues that may arise in the future. By bringing these issues to the table early on, all parties to your company can come to an agreement before enduring the costly exercise of working through them in the future.
Other benefits include:
Protecting the interests of your founding shareholders
As a business founder, it is understandable that you would want to protect not only the future of your business but your efforts, energy and, of course, your initial capital. A shareholders agreement can help in protecting what you've already put into your company, as well as keeping the casting vote for its future in your hands.
Future-proofing your company
You've put great consideration into who you choose to go into business with, but certain life events can mean you're not always guaranteed a choice in who you're partnering with. An agreement helps plan for if the unexpected happens, such as the death of a shareholder or a marital settlement. These are stipulations that your company constitution doesn't cover. Setting a value mechanism through your agreement can help determine the right share value for other shareholders to purchase those of deceased shareholders.
You know your place in the market and are aware of your competitors, but did you know that without an agreement, ex-shareholders are free to go and establish a competing business? Not if you hold the appropriate clauses in your shareholders agreement!
Demonstrating credibility and maturity
Business growth often requires leveraging the capital of external investors. An agreement is an excellent way to demonstrate your company's stability and maturity. It also shows that you have a solid, legitimate plan for its future which provides potential investors with confidence and clarity over the inner workings of your organisation.
Providing flexibility
Given that the agreement is a contract, it's only right that it be tailored to your unique circumstances. Following a standardised agreement template can not only result in holes throughout your contract, which leave everyone exposed, but can also force you into legally binding processes that simply don't fit your company. Thankfully, we specialise in tailored legal services and can answer any and all legal questions to ensure that you have a gap-proof agreement in place.
Saving precious financial resources
We understand that writing up legal documents means another line-item expense, but the financial detriment of settling disputes, or having competing businesses formed by departed shareholders could cripple your business. Saving costs in the long run is one of the silent perks of having an agreement in place.
The dangers of using a shareholders agreement template
While you'll likely be able to find many free shareholder agreement templates online, they are generic in nature and do not take into account the needs of your company and shareholders. The number one danger of using a shareholders agreement template is being left completely unprotected after putting your time into preparing it. While your intentions are good, unfortunately, the DIY legal documents are not.
Is a shareholder agreement right for my company?
At Bradley and Bray Lawyers, we're a law firm that prides itself on being strategy-driven optimists who provide unparalleled professional advice, which is why despite not being legally required, we firmly believe every company requires a shareholders agreement. No two companies are quite alike, so it pays to seek legal advice when looking to put an agreement in place.
Even if you are business partners with your significant other or hold a partnership agreement with a trusted friend, the future is unpredictable. It should be in every organisation's business plan to set out an agreement that protects everyone involved.
If your business is in the early stage of introducing a new shareholder or has existing shareholders, we firmly advocate for shareholder agreements. To ensure that you or your company are protected, contact us today for an initial consultation — your future success will thank you!
This article is general in nature and does not constitute legal advice. If you require legal advice in relation to your personal circumstances, you must formally engage our firm, or another firm to provide legal advice in relation to your matter. Bradley & Bray lawyers takes no responsibility for any use of the information provided in this article.
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