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  • Writer's pictureBelinda Konik

Why Shareholders Agreements Are a Must for Your Small Business Partnership

Embarking on a business venture is undeniably thrilling, fuelled by the anticipation of growth and success. Amidst the excitement, however, the crucial aspect of solidifying the foundation of your partnership can sometimes be overshadowed. For business owners venturing into partnerships using a company structure, the notion of crafting a shareholders agreement can occasionally be relegated to the back burner—a task reserved for a distant "we'll get around to it" moment. Yet, as the dynamic rhythm of entrepreneurship unfolds, establishing a clear, comprehensive agreement among shareholders reveals itself not merely as a legal formality, but as an indispensable compass guiding your collaborative journey.


In this article, we delve into the pivotal role of shareholders agreements and why, far from being a mere afterthought, they stand as a cornerstone for navigating the complexities of business partnerships.


What is A Shareholders Agreement?


A shareholders agreement is a legally enforceable contract governing the interpersonal relationship among the respective shareholders.


The Company has a constitution, so why do I need a Shareholders Agreement?


This question can be answered by distinguishing the difference between a company’s constitution and a shareholders agreement.


As a company is a legal entity, distinct and separate from its executive and members. A company’s constitution operates as a contract between the company and its directors and members, and as a contract between its members. Essentially, a company’s constitution covers a range of matters pertaining to the company’s internal management such as:


  • Officers and employees;

  • How a company may appoint a director;

  • How directors will be paid;

  • Terms and conditions of office for secretaries, directors’ meetings, members meetings; and

  • Transferring of shares.


A shareholders agreement, on the other hand, will expressly govern the separate, dynamic, and interpersonal relationships between the respective shareholders. A shareholder’s agreement will sit alongside the company’s constitution and may address matters that are not covered or fully addressed in the constitution.


Sometimes, a company and its constitution may have been in place for many years. Over time, the initial shareholder, or shareholders, that established the company may have departed and new shareholders come into the fold. Therefore, the original constitution may not adequately deal with and govern the relationship between the new members of the company and so a shareholders agreement governing that relationship between the new shareholders would be appropriate.


What Aspects of the Business Partnership does a Shareholders Agreement govern?


Typically, a shareholders agreement will cover a range of matters, including, but not limited to:


  • Role descriptions for those holding positions such as the managing director or CEO;

  • Detail how decisions will be made; and

  • Detail how events such as the sale of shares will be treated (for example, including a right of first refusal for remaining shareholders to have the first option to buy out a shareholder who wishes to exit the company), delegations for directors for administrative convenience, to avoid the continual need for voting on particular matters that the director may be expected to do as a matter of course, dispute resolution, and so on.


Establishing a shareholders agreement requires a level of flexibility to ensure the agreement is tailored to suit the unique needs and interests of the respective parties.


Why is a Shareholders Agreement so important?


In business, when things are going well and everyone is getting along, putting effort and expense into a shareholders agreement can seem like an unnecessary burden. However, things can change, and often little things can become big things in a short space of time, leading to a dispute. In most cases, if the parties had put the shareholders agreement in place early in the relationship, it would have made avoiding and resolving disputes more manageable. Further, even if a dispute is not the issue, a shareholders agreement can provide guidance and certainty about what happens if a shareholder wants to exit the business, or what happens in the event of the death or Total Permanent Disability (TBD) of one of the key shareholders.  While no-one wants to think about these kinds of things happening, the reality is, as the saying goes, "life happens while you are busy making other plans". Having an intentionally and thoughtfully drafted shareholders agreement in place early can help to alleviate some of the stress and anxiety that these kinds of situations create.


How Can Our Team Help?


At Jenkins Legal & Advisory, our passion is helping business owners navigate the legal aspects of running your business. Our goal is to give you authentic, strategic, and dependable business advice and guidance. We specialise in helping with a range of business legal services, including shareholders agreements. If your shareholders agreement has been sitting on the back burner for a while, or needs to be reviewed and updated, please do not hesitate to contact our office.


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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