In Short
A shareholders agreement sets out the rights and responsibilities of shareholders and how the company will be governed. It commonly includes clauses covering decision-making, board composition, issuing and selling shares, and dispute resolution. Having clear rules in place can help prevent disputes and protect the interests of both the company and its shareholders.
Tips for Businesses
Ensure your shareholders agreement clearly sets out how decisions are made, how directors are appointed or removed, and how shares can be issued or sold. Include provisions for dispute resolution, confidentiality, and intellectual property ownership. Regularly review the agreement to ensure it reflects the company’s current structure, ownership, and commercial goals.
Summary
This article explains the key clauses commonly included in a shareholders agreement for business owners in Australia. It outlines important governance, shareholding, and dispute resolution provisions and is prepared by LegalVision’s business lawyers, a commercial law firm that specialises in advising clients on corporate and commercial law matters.
On this page
- Board Composition and Quorum Requirements
- Decision-Making Process
- Directors and Voting Rights
- Issuance of New Shares
- Selling Shares
- Event of Default and Forced Sale
- Intellectual Property Ownership
- Confidentiality and Restraint Provisions
- Dispute Resolution
- Other Key Clauses
- Key Takeaways
- Frequently Asked Questions
A shareholders agreement is a key corporate governance document that sets out the relationship between:
- a company and its shareholders; and
- the shareholders themselves.
A shareholder is a person, company or other entity that owns shares in a company. The shareholders’ agreement will set out the rights of shareholders. As well as other factors, these rights will depend on the class of shares that the shareholders own. Any company with more than one shareholder should have a shareholders’ agreement in place, as this document will be vital if a dispute occurs:
- among shareholders; or
- between the company and a particular shareholder.
Shareholders are different to company directors, who have the responsibility of managing the company. This article will explain the key clauses that a shareholders’ agreement will usually contain.
Board Composition and Quorum Requirements
The shareholders’ agreement should specify the minimum and maximum number of directors that can serve on the board. For example, the board may comprise between one and seven directors, with specific appointment rights allocated to different shareholders based on their shareholding percentage or founder status.
Importantly, the agreement should establish quorum requirements for board meetings. A typical quorum might require more than 50% of directors to be present, with additional requirements such as ensuring at least one founder director is present for any meeting to proceed. Generally, if a quorum is not achieved within 30 minutes, the meeting may be adjourned.
Decision-Making Process
Company decisions can be made by either directors or shareholders. The shareholders’ agreement will explain what percentage of votes is necessary to pass resolutions and make decisions on certain matters. It will also explain what decisions:
- only directors can make; and
- require shareholder approval.
Critical Business Decisions
The shareholders’ agreement may have a specific list of critical business decisions that a higher percentage of either directors or shareholders must approve.
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Directors and Voting Rights
The shareholders’ agreement will specify which shareholders have the right to appoint a director. Usually, the agreement will set out a minimum percentage shareholding that is required to appoint a director.
The shareholders’ agreement will also state how to appoint a director. For example, notice may need to be provided, or a resolution may need to be passed. The shareholders’ agreement should also set out how to remove a director from their position. Typically, a director can be removed by:
- voluntary resignation;
- a decision of the board (either by a simple majority or a higher percentage approval, such as 75%);
- a decision of the appointing shareholder; or
- the shareholders forcibly removing the director.
As a shareholder, you may have special voting rights attached to your shares. This is usually dependent on the class of shares you hold (i.e. ordinary or preference shares). Your shareholders’ agreement will set out:
- the rights attached to each share class; and
- whether you have the right to vote at a shareholder meeting.
Issuance of New Shares
The shareholders’ agreement will also set out the process for issuing new shares in the company. This is important because the issuance of new shares dilutes existing shareholders’ ownership of the company.
A company will usually issue new shares:
- when it is looking to bring on investors; or
- to raise additional money from existing shareholders.
Typically, when a company wishes to issue new shares, it must first obtain approval from the board. The company must then offer the new shares to existing shareholders before it can offer them to third parties. This is often referred to as the first right of refusal or pre-emptive rights.
Selling Shares
Your shareholders agreement should also set out the process for when a shareholder wishes to sell some or all of their shares, either to an existing shareholder or a third party. Similar to when a company issues new shares, a shareholder will usually need to offer their shares to existing shareholders first if they wish to sell their shares.
The shareholder’s agreement may also include drag-along and tag-along clauses, which set out what happens if a third party wishes to purchase the whole company. Drag-along and tag-along clauses set out the rights of majority and minority shareholders if this occurs.
Event of Default and Forced Sale
The agreement should define specific events that trigger a shareholder’s obligation to sell their shares, such as:
- material breach of the agreement;
- insolvency or bankruptcy;
- ceasing employment with the company (for employee shareholders); or
- committing fraud or serious misconduct.
Intellectual Property Ownership
The shareholders’ agreement should clearly address intellectual property ownership. All intellectual property developed by the company or its employees typically belongs to the company automatically. Additionally, shareholders may be required to assign any intellectual property they develop that relates to the company’s business. This ensures the company maintains full control over its intellectual assets and prevents disputes over ownership of valuable IP.
Confidentiality and Restraint Provisions
Shareholders’ agreements commonly include robust confidentiality clauses protecting sensitive business information. These provisions require shareholders to keep confidential all information relating to the company’s business, assets, affairs and client relationships. The agreement may also include non-compete and non-solicitation restraints that prevent shareholders from:
- engaging in competing businesses for a specified period after ceasing to hold shares;
- soliciting the company’s clients, customers or suppliers; and
- enticing away employees or contractors.
Dispute Resolution
Your shareholders’ agreement will set out the process for resolving disputes between:
- multiple shareholders; or
- shareholders and the company.
This is an important reason for adopting a shareholders’ agreement. Having a clear dispute resolution process can prevent ongoing disputes from affecting business operations. It is important to consider which dispute resolution process is suitable for your individual business from the outset. Typically, shareholders will attempt to resolve a dispute themselves before turning to mediation or litigation.
Other Key Clauses
Your shareholders’ agreement may include other clauses. For example, it may include additional vesting or leaver clausesthat allow the company to force the sale of an employee’s shares if they leave employment. Where the company wishes to implement an employee share scheme, the shareholders’ agreement will also set the maximum percentage of share capital the company can use. The agreement should set out whetherthere is any financial information that is to be provided to shareholders, such as profit and loss statements. If dividends are payable to shareholders, the agreement should set out a process for determining what dividends are payable.
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Key Takeaways
A shareholders’ agreement is a key document for a company with more than one shareholder. Your shareholders’ agreement should cover several key clauses, including how to:
- issue or sell shares;
- make decisions in the company;
- appoint a director and vote at meetings; and
- resolve disputes.
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Frequently Asked Questions
A shareholders’ agreement is a legal document that sets out the rights and obligations of shareholders and how the company will be managed. It typically covers decision-making processes, share ownership rules, and procedures for resolving disputes between shareholders.
A shareholders’ agreement helps prevent disputes by clearly outlining how key matters such as issuing shares, appointing directors, and selling shares will be handled. It also protects the interests of both majority and minority shareholders by setting clear rules for the company’s governance.
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