A shareholders agreement is a legal contract agreed to by the shareholders of a company, governing both their business relationship and arrangements. A shareholders agreement also sets out the shareholders rights, responsibilities, liabilities and obligations. Generally a shareholders agreement will regulate matters which are not covered by the company’s constitution.

A shareholders agreement is a complex document which is one of the most important documents you, as a businessperson, will enter into. It’s important to ensure that you receive good legal advice when entering into one, but by reading this article you will have a checklist of important clauses to look out for when negotiating.

1. Business Operations

A shareholders agreement, particularly one for a start-up, will generally set out how the business is to be operated. If you’ve got a small number of shareholders who also have active roles in the business, it’s common to set out those roles in the agreement. Bigger companies are less likely to set out the specific roles of the management team, but might simply set out an overall objective for the company.

2. Directors

A company structure has two key groups of stakeholders; shareholders and directors. The shareholders own the company and appoint a board of directors to oversee the management of the company. The board of directors is a powerful organisation, and the shareholders agreement therefore needs to set out how the directors can be appointed, describe in detail their powers, and define their duties.

3. Shareholdings in Shareholders Agreement

Clearly some of the more important sections of a shareholders agreement are the clauses and schedules setting out the individual shareholdings of the shareholders. Generally the individual shareholdings will be set out in a schedule to the agreement; allowing the agreement to be easily amended if the shareholders change over time.

4. Sale or Transfer Clauses

Disputes often arise when one or more shareholders decide they want to sell or transfer their shares in a company. In order to reduce the possibility of such disputes, shareholders agreements often include the following clauses: “right of first refusal”, “tag along” and “drag along”. A brief description of each follows.

A “right of first refusal” means if one shareholder decides he wants to sell his shares to a third party, the current shareholders have the right to purchase them at any rate agreed with the third party. If the third party is willing to pay a higher price than the current shareholders, then generally the sale will be acceptable.

A “tag along” clause protects a minority shareholder. If a majority shareholder decides to sell out, the “tag along” clause means that the minority shareholder has a right to be bought out on a pro-rata rate.

A “drag along” clause prevents a recalcitrant minority shareholder from delaying a sale. If a majority shareholder decides to sell out, in certain circumstances, he will be able to force the minority shareholders to sell at the same time.

Bear in mind that the above mentioned clauses need to be negotiated individually for each company; there is no one size fits all solution.

Conclusion

We’ve only touched upon a few of the key clauses you need to keep an eye out for in a shareholders agreement. Your shareholders agreement is one of the most important documents you’ll ever deal with, so make sure you take the time and effort to review it properly. If you’d like one of our lawyers to assist, just get in touch!

Lachlan McKnight

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