What Are the Key Clauses in a Shareholders Agreement?

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:

• amongst 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. 

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.

Directors and Voting Rights

The shareholders agreement will specify which shareholders have rights 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 they 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 sets 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.

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 clauses that 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 if there 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.

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. 

It is important to have your shareholders agreement drafted properly so that it is tailored to your business’ needs. If you have questions about drafting a shareholders agreement, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.