Drafting a Shareholders Agreement: Does it need to cover the issuing of new shares and dividends?  

A Shareholders Agreement is a contract that has been negotiated by the shareholders of a company outside the Corporations Act. It typically governs their relationship and business arrangements, details their rights, responsibilities, obligations and liabilities, and protects their interests, having regard to their particular circumstances. Amongst many other important matters, a Shareholders’ Agreement should address the issuance of new shares and dividends. Both matters have a direct impact on a shareholder and it is important that issues surrounding new shares and dividends are well covered. A commercial lawyer specialising in business law would certainly be the best person to speak to if you’re considering drafting a Shareholders’ Agreement.

How can new shares be issued?

The Shareholders’ Agreement should set out the percentage that is required for approval of the issuance of new shares. Does it require only a 75% majority or does it require unanimous approval? Having a lower majority makes it easier to issue new shares and obtain investment, but without unanimous approval, minority shareholders may feel that they are being oppressed, and may make a legal claim against the company.

Will new shares first be offered to existing shareholders?

The Shareholders’ Agreement should include whether or not new shares will be first issued to the shareholders. This is normal practice to allow existing shareholders to have “first dibs” on new shares to maintain their proportionate shareholdings.

What dividends are payable?

When dividends are to be paid and when directors, instead of shareholders, are to make decisions. The directors of the company will also fix the amount, time and method for payment.

Will dividends be franked?

A Shareholders’ Agreement should state whether dividends declared by the company will be unfranked, partly franked or full franked. Typically dividends declared by the company are franked to the maximum extent permitted, based on the company’s available franking credits.

Issuing new shares may significantly dilute the shareholdings of a shareholder, and payment of dividends affects the company’s cash flow. Both of these matters are important and generally require the approval of shareholders and/or directors. It is important that the Shareholders’ Agreement adequately sets out the procedure for dealing with these matters and that the process works as smoothly as possible.

Conclusion

Whether you’re a director, founder, shareholder, or some other stakeholder, if you have any questions regarding a Shareholders’ Agreement or are concerned that your business is not adequately protected, contact LegalVision today and speak with one of our commercial lawyers. Our commercial lawyers can provide you with advice before you invest in a company and enter into a Shareholders’ Agreement.