What Is A Shareholders Agreement?

Contents

What Is A Shareholders Agreement?

A Shareholders Agreement is an important contract among a company’s shareholders. It outlines the decision-making process, what happens if a shareholder wishes to exit the company, how disputes are managed, and other key matters. Establishing these ground rules is essential for maintaining a healthy relationship and ensuring the business runs smoothly—particularly as it grows and the stakes increase, even when working with friends or family.

When Do I Need It?

If you’re setting up a company with more than one shareholder you need a Shareholders Agreement.

How Do I Use It?

Each of the shareholders will sign the Shareholders Agreement. This then becomes a legally binding record of the terms set out in the agreement. You should refer to it whenever a relevant consideration comes up in the course of business e.g. when making decisions in the company, or resolving a dispute.

Shareholders Agreement Example

Peter and Grace want to start a cafe together. They register a company where they are each 50% shareholders. They get a lawyer to draft a Shareholders Agreement setting out the details of their business relationship. After 6 months, Peter decides to leave the business because he gets an opportunity to work overseas. Grace wants to take full ownership of the company when Peter leaves. However, Peter has a friend, Maddie, who wants to buy Peter’s half of the company. Peter and Grace refer to the Shareholders Agreement, which says that if one shareholder wants to leave, they must offer to sell their shares to the other shareholder before offering to sell them to someone else. As a result, Grace is able to buy Peter’s half of the company as they originally agreed and Maddie will unfortunately miss out on this opportunity.

What’s In A Shareholder Agreement?

A Shareholders Agreement addresses a variety of issues relevant to the particular company. It is a good idea to get a lawyer to provide you with a list of issues to consider and advise you on what’s normal if you’re unsure. You can also tell the lawyer any specific requirements related to your business and they can advise on the best way to incorporate these into the agreement.

Some key things to think about are:

How many shareholders will there be?
What proportion of shares is owned by each of the shareholders?
What is the relationship between the directors and the shareholders?
How will disputes be dealt with?
What happens if a shareholder wants to leave?

What Are The Benefits of a Shareholders Agreement?

A well-drafted Shareholders Agreement provides clarity and security for all shareholders. It helps to prevent disputes by setting clear expectations for decision-making, share transfers, and the roles and responsibilities of each shareholder. Additionally, it protects shareholders’ interests by establishing a transparent framework for how the company will operate, particularly when faced with major changes like the departure of a shareholder or significant business decisions. This proactive approach helps avoid misunderstandings and fosters long-term stability and growth for the company.

Need Help With A Shareholders Agreement?

Putting together a Shareholders Agreement can seem like a daunting process, as it’s hard to know what to include and how to word it. It’s a good idea to invest in a lawyer to assist you with this process, as it’s a one-off cost that can save you from disputes and liability in the long run.

How Is A Shareholders Agreement Different From The Company Constitution?

While both a Shareholders Agreement and a Company Constitution provide governance for how a company is run, they serve different purposes. A Company Constitution is a more formal document required under corporate law that sets out the company’s internal management rules. It is generally filed with relevant authorities and is binding on the company as a whole. A Shareholders Agreement, on the other hand, is a private contract between shareholders and provides a more tailored approach to managing the specific rights and responsibilities of the shareholders. It often covers topics that may not be addressed in the Constitution, such as restrictions on share transfers, shareholder exit provisions, and dispute resolution processes. Having both documents allows a company to operate effectively while catering to the unique needs of its shareholders.

Key Takeaways

To summarise what we’ve covered:

A Shareholders Agreement is a crucial document for any company with more than one shareholder, as it sets out clear rules on decision-making, dispute resolution, and what happens if a shareholder exits.
This agreement is important to ensure clarity and security among shareholders, fostering a healthy business relationship as the company grows.
Unlike a Company Constitution, a Shareholders Agreement is a private contract that allows more flexibility to address unique needs and situations of shareholders, such as share transfers and exit provisions.
It’s advisable to consult a lawyer when drafting or reviewing a Shareholders Agreement to make sure it accurately reflects your business needs and prevents future disputes.

If you need assistance with drafting or reviewing a Shareholders Agreement, reach out to our team at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligation chat.

Minna Boyle

Minna is the Head of People & Culture at Sprintlaw. After completing a law degree and working in a top-tier firm, Minna moved to NewLaw and now manages the people operations across Sprintlaw.