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What Is a Shareholders Agreement?

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A shareholders agreement governs the relationship between a company’s directors and shareholders. It is an agreement made between two or more shareholders and it applies in addition to (or overrides) the company’s constitution. Every shareholders agreement should be individually tailored, because every company is different.

The Purpose of Shareholders Agreements

For most companies, especially startups, a shareholders agreement is its most important document. It governs the relationship between a company’s directors and shareholders. It will cover matters such as:

  • issuing new shares;
  • sale of existing shares;
  • directors duties;
  • conduct of board and shareholder meetings; and
  • dispute resolution.

 A well drafted shareholders agreement should take into account the:

  • number of shareholders; 
  • objectives of the shareholders;
  • funding arrangements; and 
  • nature of the business or industry in which the company operates.

Your shareholders agreement will apply in addition to the rules contained in the Corporations Act and company constitution regarding management of your company.

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).

Generally, the shareholders agreement will override the company’s constitution.

The Corporations Act provides some basic safeguards for shareholders in the form of the “replaceable rules”. The replaceable rules apply to all companies registered after 1 July 1998. These rules may be displaced or modified by a company constitution. However, there are some mandatory replaceable rules that you cannot displace. These rules are generally concerned with protecting minority shareholders. 

Aside from these rules, however, the Corporations Act does not adequately 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. While the Corporations Act does not require companies to have a Shareholders Agreement, having one can therefore be beneficial for setting ground rules about issues that affect shareholders.

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Key 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 how directors are appointed.

For example, you may decide that:

  • only shareholders holding a certain percentage of shares can appoint directors; or
  • as founder, you should always have a right to appoint a director.

A shareholders agreement should also set out when and how a director can be removed.

For example, this may be if the director:

  • commits fraud; or
  • becomes incapable of managing their affairs due to a medical condition.

Board Meetings

The frequency of board meetings, as well as who can call for a directors meeting, are essential. These meetings should be quarterly and more frequently as agreed. 

Duties of Directors

The Corporations Act and general law sets out a range of directors’ duties. The shareholders agreement can set out the key duties and additional duties, including to:

  1. represent the interests of the shareholders;
  2. avoid conflicts of interest;
  3. discharge all duties with due care and diligence;
  4. not use their position, or information obtained from their position, to gain advantage for themselves; and
  5. 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. 

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 how to resolve a deadlock between the directors or the shareholders. This may include a direct meeting and mediation.

New Shares and Dividends

An issue of new shares requires either unanimous approval or majority approval of shareholders. The shareholders will often require that new shares are first offered to existing shareholders on a pro rata basis.

Regarding dividends, a shareholders agreement will include how the directors of the company will determine that a dividend is payable. They also fix the amount, time and method for payment. 

Transferring and Selling Shares and Takeover Offers

A shareholders agreement should outline how a shareholder can sell his or her 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 needs to be set out.

For example, the agreement may set out:

  • a valuation formula; or
  • that the company will be valued by an independent accountant.

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 governs how you should run your company. If you need help with drafting a shareholders agreement, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is sweat equity?

Sweat equity is the time and effort that people contribute to a project, with no financial input from the contributors.

What is vesting?

Share vesting occurs when a shareholder acquires full ownership of shares. A share is considered vested when the employee may leave the job, yet maintain ownership of the share with no consequences.

What is drag along?

Drag along is where the majority shareholder(s) can require the minority shareholder(s) to sell, so that the bidder can buy the whole company.

What is tag along?

The agreement can include that if there is a takeover offer, and the majority shareholder(s) want to sell, the minority shareholder(s) can ‘tag along’ and sell their shares to the bidder at the same price.

What are preference shares?

Preference shares are shared that entitle the shareholder to a fixed dividend, whose payment of the dividend takes priority over that of ordinary share dividends. In the event of a company bankruptcy, preferred stock shareholders have a right to be paid from company assets first.

Sian McLachlan

Sian McLachlan

Practice Leader

Sian is a Practice Leader with LegalVision’s Corporate team. She is LegalVision’s first point of contact for clients with financing or business structuring enquiries. Before joining LegalVision, Sian was a solicitor at an international top-tier firm in their Banking & Finance team. Sian has a large number of startup and fintech clients and understands their legal needs. She provides end-to-end guidance for companies as they scale, from choosing the right corporate structure to deciding on funding options.

Qualifications: Juris Doctor, Bachelor of Commerce, University of Sydney.

Read all articles by Sian

About LegalVision

LegalVision is an innovative commercial law firm that provides businesses with affordable, unlimited and ongoing legal assistance through our membership. We operate in Australia, the United Kingdom and New Zealand.

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