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  • Writer's pictureJackson Cain

Shareholders agreements - What are they and why do I need one?

If you are setting up a company and there is more than one shareholder, it is important to have in place a comprehensive shareholders agreement. Without such an agreement in place, the operation of the company can become uncertain and unnecessarily complicated. However, even without a shareholders agreement in place shareholders still owe obligations to each other under the company’s constitution (noting that the agreement is separate to the company’s constitution), the Corporations Act 2001 (Cth) and the common law in Australia. Even if your company has been operating for a long time, you can still enter into a shareholders agreement to govern the ongoing operations of your company in the future.


A shareholders agreement is essentially a contract between the shareholders of a company. It governs how decisions are made on behalf of the company, how disputes or deadlocks are to be addressed, the process for the sale of shares or when a shareholder leaves the company, as well as other important operations and decisions of the company. The agreement should also set out the scope and extent of your rights and obligations as a shareholder and should be tailored to the objectives and particular operations of the company being formed. It is important to ensure that the terms of a shareholders agreement are valid and enforceable under the company’s constitution, the Corporations Act and (where applicable) the common law in Australia.

If you are a majority shareholder, you may want the agreement to contain terms that provide you with greater voting rights or a first right of refusal in relation to the sale of any shares. Alternatively, if you are a minority shareholder, you should ensure that the terms of the agreement allow you to have the ability to appoint a director, access company related information when required, can tag along (meaning that the minority shareholder can join with a majority shareholder) with in the sale of the company or buy out the shares of the company (including a first right of refusal).


The provisions of the shareholders agreement will usually be limitations to the actions that the company’s board of directors can take without first obtaining shareholder approval. There will also often be an ability for shareholders to veto certain board or shareholder decisions. These provisions will specify the type of shareholder approval required for the board to take an action, including by way of:

  1. A majority of at least 50% of shareholders; and

  2. The passing of a special resolution at a general meeting. Under the Corporations Act, such a resolution requires sufficient notice to be provided that the resolution is to be proposed and at least a 75% majority in favour to be passed.

Common themes dealt with in shareholders agreements include:

  1. Management structure, removal and appointment of directors and what powers will be awarded to managers or directors.

  2. Exit and share sale processes for shareholders wishing to leave the company.

  3. Rights and powers attached to particular classes of shares in the company.

  4. Bank accounts and funding or contribution arrangements.

  5. The process for holding director or shareholder meetings, including notice periods or quorum requirements.

  6. How and when dividends must be paid to the shareholders.

  7. Confidentiality and non-compete/restraint of trade requirements of shareholders.

  8. Delegation of power to engage in transactions or expenses or to enter contracts on the company’s behalf.

As with many types of commercial contracts, there is no one size fits all type of shareholders agreement. They must be tailored to the new company and its intended business to ensure that any elements unique to your new company’s circumstances are dealt with in the agreement where possible. The certainty and direction provided by a shareholders agreement can better prepare you to focus on the operation of your company. If you’d like to talk to someone about shareholders agreements, please contact Jenkins Legal & Advisory on 02 4929 2000 or email office@jenkinslegal.com.au.


This article is not legal advice, and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.


 

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