A shareholders agreement governs the relationship between a company’s directors and shareholders. It is an agreement made between two or more shareholders and can apply in addition to or override the company’s constitution. Since every company is different, every shareholders agreement should be individually tailored. Company shareholders will enter this agreement to govern their relationship, protect their interests, and establish the rules for the management and operation of the company. This article will unpack shareholder agreements and how they aid in managing your company.
The Purpose of Shareholders Agreements
For most companies, especially startups, a shareholders agreement is its most important document. It primarily governs the relationship between a company’s directors and shareholders. The agreement also outlines the rights, responsibilities and obligations of individuals or entities holding shares in a company. It will cover matters such as:
- issuing new shares;
- sale and transfer of existing shares;
- director’s duties;
- protection of minority shareholders;
- conduct of board and shareholder meetings; and
- dispute resolution mechanisms.
The Corporations Act (the Act) and your company constitution will outline rules governing your company’s management. Additionally, the shareholders agreement you have in place will also be applicable.
Where Are the Rules for Managing My Company?
Management of your company will be governed by a combination of:
- the Corporations Act;
- your company’s constitution (if you have one); and
- your company’s shareholders agreement (if you have one).
In situations of conflict between the shareholders agreement and the company constitution, your shareholders agreement may take precedence. However, this is dependent on the state or territory of your business, as well as the specific terms specified in each document.
The Act provides some basic safeguards for shareholders in the form of “replaceable rules.” The replaceable rules apply to all companies registered after 1 July 1998. Your company constitution may displace or modify these rules. However, there are some mandatory replaceable rules that you cannot displace. These rules are generally concerned with protecting minority shareholders.
Aside from these rules, the Act does not completely deal with the rights of shareholders. As well as this, a standard company constitution will not always protect you and your shareholders in the event of a dispute between shareholders and members. Therefore, while the Act does not require companies to have a shareholders agreement, having one can be beneficial for setting ground rules about issues that may affect shareholders. To avoid potential conflicts, it is important to carefully draft your shareholders agreement so that it aligns with the company constitution.
Continue reading this article below the formKey Clauses
Every shareholders agreement is different. However, there are several key clauses every agreement should have.
Directors and the Board
A shareholders agreement can set out the minimum and maximum number of directors. It can also set out the process for appointing directors.
For example, you may decide that:
- only shareholders holding a certain percentage of shares can appoint directors; or
- as a founder, you should always have the right to appoint a director.
A shareholders agreement should also set out when and how the company can remove a director. For example, this may be if the director:
- commits fraud; or
- becomes incapable of managing their affairs due to a medical condition.
Board Meetings
Establishing the frequency of board meetings and the authority to call for directors’ meetings is critical for effective corporate governance. It is recommended to hold these meetings quarterly, with the flexibility for more frequent gatherings based on mutual agreement among the board members.
Duties of Directors
The Act and general law sets out a range of director duties. The shareholders agreement can also set out the key duties and additional duties, including to:
- represent the interests of the shareholders;
- avoid conflicts of interest;
- discharge all duties with due care and diligence;
- not use their position, or information obtained from their position, to gain an advantage for themselves; and
- not cause detriment to the company.
Shareholders Meetings
A general meeting is a meeting of the shareholders of the company. A shareholders agreement should set out what issues the shareholders decide, rather than the directors. This ensures clarity and defines the respective roles and responsibilities of shareholders and directors in the decision-making process.
Deadlocks and Disputes
Where shareholders cannot agree on the management of the company, a deadlock provision resolves this. A shareholders agreement should set out how to resolve disputes, including resolving a deadlock between the directors and the shareholders. This may include a direct meeting, arbitration or mediation procedures.
New Shares and Dividends
An issue of new shares requires either unanimous or majority approval of shareholders. The shareholders will often require that new shares be offered to existing shareholders on a pro rata basis.
In terms of dividends, a shareholders agreement outlines the specific criteria used by company directors to assess the possibility of distributing dividends. This includes specifying the amount, timing, and payment method for dividends.
Transferring and Selling Shares and Takeover Offers
A shareholders agreement should outline how a shareholder can sell their shares. This will require notice in writing to other shareholders and the option of purchasing the shares pro rata in proportion to their existing shareholding. The method of valuing the shares must be set out, for instance, through:
- a valuation formula; or
- valuation by an independent accountant.
This guide will help you to understand your corporate governance responsibilities, including the decision-making processes.
Key Takeaways
A shareholders agreement governs the relationship between a company’s directors and shareholders. It is often a company’s most important document. Together with the Corporations Act and your company constitution, it regulates how you should run your company. It is important to tailor your shareholder agreement to the specific needs and goals of your company. When approaching shareholders agreements, legal advice is strongly recommended during the drafting and negotiation process.
If you have any questions about your shareholders agreements, our experienced commercial lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
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