A shareholders agreement is a legal contract between the shareholders of a company that governs the shareholders, their business relationship and arrangements. A shareholders’ agreement also sets out the role of the directors of your company and how the board will conduct meetings and business operations. More specifically, a well-drafted shareholders’ agreement should outline the directors who will form the board, the responsibilities of each shareholder, and how these directors can be appointed and removed. An experienced contract lawyer usually drafts this Agreement.

Here we provide a brief summary of what a good shareholders’ agreement covers in relation to its directors.

How many directors will the company have?

At the time of signing, the shareholders agreement should clearly set out who the current directors are. As a company grows, there may be more directors, and it is important that the shareholders agreement also states what the maximum number of directors on the board at any time will be. What the maximum number should be depends on the future plans of the company. Speak with a contract lawyer about the unique circumstances of your business so that he or she can best advise you on how to structure your company’s Shareholders’ Agreement.

Which shareholders can appoint a director?

The shareholders agreement needs to set out the procedure for the appointment of a director. Directors can be appointed by:

  • A resolution passed by the shareholders, where a 50% majority (or more) is required to agree to the appointment of a director; or
  • By a shareholder holding a certain percentage of shares.

There is no right or wrong answer. It is essentially a commercial decision for the shareholders to make.

What responsibilities does a director of a company have?

If a particular shareholder nominates a director, the director may represent the interests of that shareholder. However, in addition to representing the interests of a particular shareholder, a director must also:

  • Discharge his or her duties in accordance with the Corporations Act;
  • Exercise a degree of care and diligence that a reasonable person would exercise in a similar position;
  • Act in good faith; and
  • Act in the best interests of the company.

How can a director be removed?

Directors can be removed for a variety of reasons, including, but not limited to:

  • Being disqualified from managing corporations under the Corporations Act;
  • Breaching his or her duties as a director; and
  • Breaching a material clause of this agreement.

How the director can be removed is, once again, a commercial decision for the company. Generally, there is a procedure where the director is given notice of any breaches, and given an opportunity to remedy that breach. Regardless of what procedure the company decides on, it should be clearly set out in the shareholders’ agreement.

Conclusion

The shareholders own the company but the directors run the company. It is essential that the responsibilities of the directors and how the business and board meetings are to be conducted be clearly set out in the shareholders agreement to avoid disputes between the directors and shareholders.

A shareholders agreement sets out the foundation of the relationship between the shareholders, and also between the shareholders and directors. Every company with more than one shareholder should have a shareholders agreement. If you have any questions regarding the setup of your company or drafting of a shareholders agreement, you should speak to one of our contract solicitors.

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