Allied Legal’s Comprehensive Guide to Shareholders' Agreement – Why is it important for your business?

Introduction

Shareholders' agreements play a vital role in defining the rights and obligations of shareholders in a company. A well-drafted shareholders' agreement can help prevent disputes, protect shareholder interests, and provide clarity on important matters.

Allied Legal’s Commercial Lawyers can help you draft a tailored and comprehensive shareholders’ agreement. Contact us today to start protecting your interests.

In this guide, we'll dive into what makes shareholders' agreements important, what they include, and how they can help your business run smoothly.

What is a Shareholders' Agreement?

A shareholders' agreement is a contract entered into by shareholders of a company. It supplements the company's constitution and governs the relationship between shareholders, outlining their rights, responsibilities, and rules for decision-making within the company.

The primary objective of a shareholders' agreement is to mitigate conflicts among shareholders, minimise disruptions to company operations, and ensure smooth business continuity, particularly when shareholders intend to buy or sell shares.

When should a Shareholders’ Agreement be prepared and signed?

It is highly recommended that a business prepares and sign a Shareholders' Agreement in the following situation:

• At the inception of the relationship between potential shareholders, before initiating any joint business ventures or endeavours;
• For an existing company, before any shares are issued, sold, or transferred to an unrelated third party.

A Shareholders' Agreement should not be postponed or overlooked. More often, clients delay this important step or underestimate the importance of formalising an agreement, relying instead on informal agreement.

However, conflicts among shareholders can arise, escalating into costly and prolonged disputes that could have been pre-empted by having a Shareholders' Agreement in place to guide and resolve them.

Essential Clauses in Shareholders' Agreement

A well-crafted shareholders' agreement encompasses various critical elements, including but not limited to:

1. Board Composition: Shareholders' agreement often details the composition, selection process, and role of the board of directors.
2. Management and Decision-Making: By delineating the powers and responsibilities of directors and shareholders, conflicts over decision-making authority can be pre-empted.
3. Share Transfer Restrictions: These provisions limit share transfers without the consent of other shareholders or the company, maintaining control over shareholder composition.
4. Dividend Policy: Clearly defined guidelines on dividend distribution offer shareholders certainty regarding when and how dividends will be allocated.
5. Pre-emptive Rights: These rights grant existing shareholders the option to purchase shares before they are offered to external parties.
6. Reserved Matters: Specifying decisions requiring approval from a special majority of shareholders or the board ensures important matters are subject to appropriate scrutiny.
7. Tag Along and Drag Along Rights: These rights protect minority shareholders in the event of a majority shareholder exit. Tag-along rights allow minority shareholders to sell their shares alongside a majority shareholder, while drag-along rights compel minority shareholders to sell on the same terms as the majority shareholder, benefiting both parties in potential sale scenarios.
8. Company Safeguards: Non-compete clauses, restraints, and intellectual property ownership. These are often absent from the company's constitution, and as shareholders typically aren't employees, it's vital to safeguard the business against competition and preserve company IP and sensitive information in case a shareholder departs.
9. Exit Strategy: Shareholders' agreement must outline procedures for share sales, such as pre-emptive rights, rights of first refusal, or buy-sell agreement, ensuring a structured approach to shareholder exits.
10. Dispute Resolution Mechanisms: Establishing protocols for resolving disputes, such as mediation or arbitration, is essential to prevent conflicts from escalating.

By incorporating these provisions into a shareholders' agreement, businesses can establish a robust framework for governance, decision-making, and conflict resolution, promoting stability and protecting shareholder interests.

Reach out to Allied Legal's team of experienced commercial lawyers, for expert guidance on drafting or reviewing your shareholders' agreement.

Best Practice - Tailoring Shareholders' Agreement to Your Business

• Customisation: Each company is unique, so a shareholders' agreement should be tailored to reflect the specific circumstances and needs of the business and its shareholders. Avoid using generic templates that could be detrimental to your business.
• Legal Advice: Seeking guidance from experienced commercial lawyers, such as Allied Legal, can ensure that the shareholders' agreement aligns with Australian law and serves the best interests of the company and its shareholders.

Other essential commercial documents that you require for your business

While a Shareholders' Agreement addresses many aspects, it may not cover every detail. Considering the business structure and its unique commercial requirements, it's advisable to review, update, or seek counsel on the following, including but not limited to:

1. Subscription Agreement;
2. Business Structure Evaluation;
3. Company Constitution;
4. Buy/Sell Agreement;
5. Loan Agreement;
6. Intellectual Property Agreement and Protection Strategies;
7. Resolutions for Share Sales, Buybacks, and Splits;
8. Employment Agreement;
9. Contractor Agreement;
10. Licence Agreement;
11. Service Agreement.

Allied Legal’s Commercial Lawyers can assist you with all your commercial needs for your business. Call us today to discuss how we can safeguard your business.

Contact Allied Legal for your commercial legal needs today!

A shareholders' agreement is absolutely essential for businesses in Australia, providing clarity, protection, and stability to shareholders and the business as a whole.

For expert legal guidance on drafting and reviewing shareholders' agreements tailored to your business's needs, contact Allied Legal's team of experienced commercial lawyers today at 03 8691 3111 or email us at hello@alliedlegal.com.au.