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A shareholders’ agreement is a legally binding contract that exists between the shareholders and directors of a company. The shareholders’ agreement outlines the key operations and management of the company. It details various aspects, including:

  • the roles and responsibilities of shareholders and directors;
  • how directors will conduct board meetings;
  • entering and exiting the company; and 
  • how important decisions of the company will be made. 

If you are setting up a company that will have more than one shareholder, it is important that you draft a shareholders’ agreement. Importantly, you want to tailor this agreement to the best interests of your company and likewise consider the future goals of the company. This article provides an overview of what a good shareholders’ agreement covers concerning its directors.

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Number of Company Directors 

At the time of signing, the shareholders’ agreement should very clearly identify the number of company directors and the names of all current directors. It is important for the shareholders’ agreement to also state the maximum number of directors that can sit on the board at any one time.

However, the maximum number will depend on the future plans of your company. As the company grows, it may be the case that you add new directors. In doing so, you must always maintain compliance with the maximum number stated in the shareholders’ agreement.

Importantly, engaging a corporate lawyer about the unique circumstances of your business can be extremely beneficial. A professional advisor can offer tailored advice on how to best structure your company’s shareholders’ agreement.

Appointment of Directors to the Board

Your shareholders’ agreement should also clearly set out the procedure for appointing (and removing) a director on the board. There are various ways in which your company may appoint a director. Two common ways are by:

  • shareholders passing a special resolution, where a 50% majority (or more) is required to agree to the appointment of a director; or
  • 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.

Removal of a Director

Additionally, the shareholders’ agreement should also outline the process of how to remove a director from the board. When doing so, it is important that your company closely follows each step to avoid issues or disputes that may arise. 

Likewise, there are a variety of reasons you might decide to remove a company director, including if they:

  • breach his or her director duties;
  • breach a material clause of the shareholders’ agreement;
  • gain a conviction of a serious offence. 

In deciding what a ‘serious office’ is, you can turn to the Corporations Act for more details.

How you remove a director is, once again, a commercial decision for the company. Generally, there is a procedure where your company should give the director a notice of any breaches. Likewise, you should allow them to remedy that breach. Regardless of what procedure your company decides on, you should take steps to outline the whole process in the shareholders’ agreement.

Making Important Decisions

An important feature of the shareholders’ agreement is that it outlines the decision-making process, that is, how important decisions of the company are made. The shareholders’ agreement will clearly state what percentage of votes are necessary to pass a resolution. Likewise, you may be required to provide written notice to the directors, allowing the directors to make decisions on certain matters affecting the company. The shareholders’ agreement will also outline what happens if there is a deadlock in shareholder votes. Again, these are both commercial decisions for the company that will vary. 

Key Takeaways

Note that while shareholders own the company, the directors run the company. Therefore, it is essential that the responsibilities of directors and how the business and board meetings are to be conducted be clearly set out in the shareholders’ agreement. Ultimately, you want to avoid any potential disputes or misunderstandings that may arise between the directors and shareholders.

For more information on drafting a shareholders’ agreement, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a shareholders’ agreement?

A shareholders’ agreement sets out the foundation of the relationship between the shareholders themselves, but also the relationship between the shareholders and directors. Every company with more than one shareholder should have a shareholders’ agreement.

What information about the board of directors should the agreement cover?

Importantly, there is no right or wrong answer as to what your shareholders’ agreement covers. Indeed, it is a commercial decision for your company to make. However, a good starting point is outlining the maximum number of directors, and the names of current company directors. You also want to detail the process for appointing and removing directors. Additionally, it is helpful to provide guidance on how directors can make decisions and pass resolutions. 

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