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When you form a new company with shareholders or buy shares in a company, it is important to ensure that the shareholders enter into a shareholders agreement.

A shareholders agreement sets out the roles and responsibilities of the shareholders, company management, and the rules and procedures concerning share issues including share sales, as well as how to resolve shareholder disputes. Some of the issues to consider in a shareholders agreement, particularly for minority shareholders, are set out below.

Directors

A shareholders agreement will set out which shareholders can appoint a director(s). For example, the agreement may provide that shareholders need a percentage of shares in the company (e.g. 20%) in order to appoint a director.

If you are a director as well as a shareholder in the company, notwithstanding that you may not be responsible for day-to-day management of the company, you need to ensure that you comply with your director’s duties. These are contained in the Corporations Act 2001 (Cth), as well as the common law. In brief, directors’ duties include that:

  • A director must represent the interests of shareholders;
  • A director must avoid conflicts of interest;
  • A director must discharge their duties with due care and diligence;
  • A director must not use their position or information obtained from their position, to gain advantage for themselves; and
  • A director must not cause detriment to the company.

Tag along – Drag along

A drag along clause will enable a majority shareholder (e.g. holding at least 51% of the shares), to require a minority shareholder to sell their shares to a third party purchaser at the same time.

This arises in circumstances where a third party purchaser only wants to buy the whole of the shares in the company, not just the majority share. Effectively, the majority shareholder can then force the sale to include the minority shareholders and, therefore, the shares of the whole company.

A tag along clause enables minority shareholders to require a third party purchaser to purchase the minority shareholders’ shares, as well as the majority shareholder.

This arises in circumstances where a third party purchaser intends to purchase a majority share in a company and the minority shareholders may not want to continue holding their shares alongside a new majority shareholder.

Critical business matters

A shareholders agreement may set out certain critical business matters that require a majority of directors or shareholders (e.g. 75%) to agree. Some critical business matters may also require unanimous approval of the directors or shareholders.

Some of the critical business matters might include, buying or selling assets, taking on large liabilities, changing the business model or setting dividends.

As a minority shareholder, it is important to have some say over critical business matters.

Good leaver / bad leaver

If you will be working in the company, and you are a shareholder, your shareholders agreement might provide for good leaver/bad leaver provisions. These provisions specify that a shareholder must sell their shares for a certain price depending on the circumstances in which they leave the company.

As an example, if you retire after a certain amount of years working for the company, you might be considered a good leaver. If, however, you leave the company due to termination, you might be considered a bad leaver.

Conclusion

Should you have any questions about your Shareholders Agreement, please get in touch! LegalVision’s lawyers can advise you in relation to shareholders agreements, and would be pleased to answer any of your questions.

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