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Depending on the type of business you operate and the structure of that business, you may need a shareholders agreement or a joint venture agreement. This article will discuss key aspects of a shareholders agreement and a joint venture agreement, the differences between them and when each are most appropriate. 

What Is a Shareholders Agreement?

A shareholders agreement is a critical corporate governance document. It sets out the relationship between a company and its shareholders, and the shareholders themselves. 

Key clauses found in a shareholders agreement include:

  • board appointment rights;
  • company decision making processes;
  • critical business decisions;
  • vesting provisions for founding shareholders; and
  • drag and tag along provisions

Additionally, it is essential that you draft this agreement correctly. These key terms within the agreement can affect how you can run your business. Notably, it is possible to change your shareholders agreement after execution. However, it is always best to ensure that the document is drafted correctly in the first instance and contains the necessary clauses for your business. 

When Do I Need a Shareholders Agreement?

It is best practice to have this agreement in place if you have two or more shareholders. You can find several templates for a shareholders agreement online. Otherwise, engage a lawyer to draft the agreement specifically for your business. 

While it is not a legal requirement to have one, having this agreement ensures that all parties understand how the company is managed. Likewise, the agreement should clearly detail the rights of each shareholder and how a shareholder or founder can exit the company. In practice, the main advantage of having these matters agreed upon upfront helps to reduce the likelihood of disputes. 

An Example

Gloria has recently set up her own company, and she is the sole director and shareholder. She does not plan on bringing anyone else into the business other than several young casual employees who will not have a managerial role in the business. Therefore, Gloria does not need a shareholders agreement at this stage in her business.

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What Is a Joint Venture Agreement?

A joint venture agreement is an agreement between two or more parties working together on a project with usually aligned goals. Hence, the name “joint venture”. Often, the parties to the joint venture may also continue to run their own separate businesses while operating the joint venture.

Example

Tom runs a small cake shop, and Jerry runs an ice cream shop. They both have their own ABNs and ACNs. They decide to run a temporary six-month-long project together to develop and market a new instagrammable dessert to the public. Both continue to run their own business alongside the partnered project. This would be a joint venture.

Do I Need to Set Up a Separate Company to Run My Joint Venture?

When setting up a joint venture, participants must decide whether to establish an ‘incorporated joint venture’ or an ‘unincorporated joint venture’. An incorporated joint venture involves the additional step of setting up a separate corporate entity to operate the joint venture. The members of an unincorporated joint venture are responsible for the debts and liabilities of the joint venture. In contrast, the members of an incorporated joint venture will have the usual protection of limited liability.

It is also essential to seek the advice of a tax lawyer to understand the potential tax implications when deciding how to structure your joint venture. 

Key Terms in a Joint Venture Agreement

A shareholders agreement is typically an appropriate starting point for your incorporated joint venture agreement. It will look similar to your standard shareholders agreement for a company. However, it will also include matters dealing with the operational aspects of your joint venture.

For an unincorporated joint venture, the key terms found in a joint venture agreement usually cover the following: 

  • the purpose of the venture;
  • the interest of each participant;
  • costs of the joint venture;
  • what circumstances would amount to a default event;
  • the term or duration of the joint venture; and 
  • how and when termination would occur. 

Failure to include any of the above terms would potentially result in difficulty later on if both parties disagree on what they understood were the agreed arrangements. 

Note, a joint venture agreement can also be referred to as a profit share agreement. Both documents will usually (but not always) achieve the same purpose. 

Key Takeaways

A shareholders agreement and a joint venture agreement are two distinct and separate documents. A shareholders agreement is a corporate governance document that governs the relationship between a company’s directors, shareholders and the company. In contrast, the joint venture agreement sets out each participant’s rights and obligations towards other participants. Likewise, it also sets a solid foundation for a clear business relationship between each of them going forward.

If you need help with the difference between a shareholders agreement and a joint venture agreement, or assistance with drafting these documents, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is the difference between a profit share agreement and a joint venture agreement?

A profit share agreement and a joint venture agreement can be used interchangeably and can contain similar key clauses. However, a profit share agreement can purely outline how parties will apportion the profits of a product or service.

Do I need a constitution if I have a shareholders agreement?

Ideally yes. These two documents work together and are usually interdependent. If you do not have a company constitution, the replaceable rules of the Corporations Act 2001 will apply automatically to your company.

I trust my business partners. Do I still need a Shareholders Agreement?

Ideally yes. Although you may trust your business partners, it is always best practice to document any arrangements or understandings on paper. The shareholders agreement will also set out how parties will resolve disputes should they arise.

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