Think of a Shareholders Agreement as a business prenup; whether you need one is dependant on your business and its requirements. For example, are there many investors in your business? Have people invested differing amounts of money? Do you have plans for expansion? There are many factors to consider when considering a Shareholders Agreement.
Are you a sole trader or do you have a Pty Ltd company?
A threshold question to consider is whether you’re operating as a sole trader or whether you have a Pty Ltd company established. If you’re a sole trader, you are operating under one of the simplest business structures in Australia, and you won’t need a Shareholders Agreement. Shareholders Agreements are relevant only where you have a Pty Ltd company established.
The following are issues that commonly arise in business and where a Shareholders Agreement is an invaluable asset.
My family wants to invest in my bakery to help me get started
If family or friends give you money to start your bakery and you make them shareholders in return, it’s a good idea to have a Shareholders Agreement. This Agreement will set out exactly what your family or friends have in return for their capital investment.
If you have several shareholders in your bakery and you don’t have a Shareholders Agreement, you’re likely to find yourself in a sticky situation. A Shareholders Agreement sets out what mechanisms there are to resolve deadlocks or for a shareholder to sell their shares and get out of the business or a requirement for mediation. While these mechanisms don’t stop a dispute from happening, they certainly make it easier for a dispute to be resolved.
If some shareholders are contributing financially and some are providing their in-kind assistance (such as baking daily, greeting customers etc) then it’s crucial to have a Shareholders Agreement. Where there are both capital and in-kind contributions, an Agreement will set out what rights attach to each contribution. It can set out how each should contribute to the business, with implications or penalties for shareholders who do not contribute in proportion to their shareholding.
Getting out of the business
When you expectedly or unexpectedly need to leave the business, a Shareholders Agreement comes into its own. In a partnership, some partners may contribute in kind, some may contribute only funds, some may purchase pieces of equipment on an ad hoc and as-needed basis. If a partner wants to exit the business – how will they be paid? How can they get out of the business? If the partner who bought equipment wants to get out of the business, can they sell the equipment they bought?
Having a shareholders agreement means that each of these contributions is recognised and reflected in proportional shareholding. The process to exit the business is much simpler than the partners having to agree to a price on which the equipment is purchased from the other partner, in which case multiple arguments could arise. With a shareholders agreement, a shareholder can get out by selling their shares. The Agreement can be structured so that existing shareholders have a ‘first right of refusal’ to purchase shares before they are offered to anyone else.
Whether you should have a Shareholders Agreement is a decision you should make based on your business structure and your business needs. If you have a Pty Ltd company, then you should have a Shareholders Agreement, irrespective of how large or small your business is. To get in touch with one of our business structuring specialists, call us on 1300 544 755.