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The Function of Shareholder Agreements

Are you a shareholder in a company? Or are you in need of drafting a shareholders’ agreement for your business?

Shareholder agreements are important documents for every company, big or small. The structure of a business organisation can be complex, and shareholder agreements help simplify things by clearly outlining each shareholder’s roles, responsibilities and expectations.

Because shareholder agreements vary from company to company, it is important to seek legal advice before entering one. You need someone who knows the ins and outs of commercial law and can help you create an agreement tailored to your specific needs.

Moreover, shareholder agreements are not set in stone—they can be modified or amended as the needs of the company change over time. Even if you are still a start-up and do not have any plan to raise capital, implementing a shareholder agreement from the beginning can help avoid potential disputes down the road.

This makes engaging with a commercial law firm on an ongoing basis extremely helpful, as they can help you to keep your agreement up-to-date. If you are looking for an experienced business lawyer in Sydney, Madison Marcus is here to help. We specialise in all aspects of commercial law and business advisory.

What Is a Shareholder Agreement?

A shareholders agreement is vital to establish the business’s rules and procedures, from its funding and structure to everyday management. The agreement helps prevent any issues arising during the company’s life by specifying how these problems should be handled ahead of time.

It is a legally binding contract between the owners of a company that defines each owner’s rights and obligations. A well-drafted agreement protects the interests of the shareholders by specifying what happens if there is a change. For instance, these agreements typically outline how decisions will be made, how shares can be transferred and what happens in the event of a shareholder death or other significant event.

Whilst a shareholder document is distinct from the company’s constitution, the two should be complementary. But how do you tell the difference?

  • The Constitution contains administrative details about the company. It has everything there is to know about the company’s day-to-day operations. This includes information on share class permissions, whether or not the replaceable rules under the Corporations Act apply and how resolutions are made (e.g., by way of circular resolution as opposed to meeting in person).
  • A shareholders’ agreement not only oversees the interactions between a company’s shareholders, directors and the business itself but also spells out methods accessible to shareholders and directors. These procedures regard subjects such as a shareholder’s power to elect new directors, transferring shares to other people, mergers and acquisitions activities and how shareholder conflicts are resolved.

Why Should You Have a Shareholder Agreement?

As a shareholder, you want to have some level of control over the company you’ve invested in. A shareholders’ agreement gives you that control by specifying your rights and obligations as a shareholder and how the company will be run.

Not only does this provide you with peace of mind, but it also protects your investment. If something goes wrong or if the company is sold, a shareholders’ agreement can help to ensure that you are fairly compensated for your shares.

Here are key reasons why you should draft one:

Reduce the chance of shareholder disputes

By drafting a shareholders’ agreement, current and future shareholders can proactively solve issues before they become actual problems.

Provide a dispute resolution process

Dealing with a dispute process can be costly. A shareholders’ agreement can provide a mechanism for resolving disputes quickly and efficiently without requiring expensive legal action.

Define the roles, responsibilities and expectations of shareholders

This is particularly important in family businesses, where there may be multiple shareholders with different levels of involvement in the company. A shareholders’ agreement will help avoid miscommunications or disagreements by ensuring everyone is clear about their responsibilities and expectations.

Demonstrate business maturity

Having a shareholders’ agreement in place shows that your company is serious about its business and is willing to invest in its future. This can give you a competitive edge in attracting new investors or customers.

Protect the interests of minority shareholders

Minority shareholders are often at a disadvantage regarding decision-making within a company. A shareholders’ agreement can help level the playing field by giving minority shareholders certain rights, such as the right to be consulted on major decisions or block certain decisions.

Facilitate smooth transitions in ownership

If you are planning to sell your shares or pass them on to someone else, a shareholders’ agreement can simplify the process by outlining the procedures that need to be followed.

Ensure compliance with regulations

Depending on the type of business you are in, certain regulations related to commercial law may require you to comply with them. A shareholders’ agreement can help ensure that the company meets all necessary requirements.

What Should a Shareholder Agreement Include?

Shareholder agreements are designed to be flexible, so they can typically be adjusted to fit your company’s requirements. Still, there are some standard clauses that every agreement should have:

  • Company objectives
  • Share classes and voting rights
  • Appointment of directors 
  • Dividend distribution policy
  • Board meetings, decision making and reporting requirements
  • Issuing new shares and capital calls
  • Departing shareholders and business valuation
  • Confidentiality and non-compete responsibilities
  • Events of default
  • Dispute resolution and arbitration
  • Termination
  • Governing law

How to Terminate a Shareholder Agreement?

Certain clauses need to be in every shareholder agreement to be considered valid. Some of the most common reasons an agreement is terminated are:

The organisation ceases to operate and is liquidated

All shareholders will be given specific days to sell their shares back to the company.

All of the shares are transferred to a solitary shareholder

If one shareholder buys out the others, they may wish to terminate the agreement.

And/or, if the company completes an Initial Public Offering (IPO)

When a company goes public, the agreement will be terminated and replaced by the company’s constitution. When drafting a shareholder agreement, it is important to consider the interests of all parties involved. It is also essential to ensure that the document is legally binding and enforceable.

How Madison Marcus Can Help You

Developing and growing your business takes time, energy and money. So does dispute resolution. A well-drafted shareholder agreement will benefit your company by avoiding or limiting shareholder disputes and other issues related to commercial law.

If you would like assistance from ​​ a commercial law firm in Sydney drafting or reviewing your shareholder agreement, Madison Marcus can help. We have a team of experienced corporate lawyers who can advise you on the best way to protect your interests and those of your shareholders, as well as guide you on other matters related to commercial law.

For all enquiries, contact us here.

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