The Importance of a Shareholder Agreement:

When starting a new business there are three basic structures to choose from; a sole trader, a partnership, or a company, with each having its own advantages and disadvantages. When you choose a company as the structure for your business you will become a shareholder in that company with the other people you go into business with.

Underpinning this structure is a shareholder agreement, which establishes the rules to govern the relationship between each owner of the company company. Without a shareholder agreement in place, the rules that apply are those set out in the Company Constitution and the Corporations Act.

The shareholder agreement creates an overlay that addresses issues created or left unanswered by those documents; they work together to create the rules that govern the relationship between the shareholders. Having a shareholder agreement specific to your company provides much more flexibility as you can tailor the rules to suit each owner and the business.

Our business lawyers can assist business owners on the Gold Coast and in Brisbane with the drafting of a shareholder agreement to grow their business.

This means that each shareholder agreement will be unique to the particular business. There are common clauses that are used though. A few of these include:

  • A general transfer restriction that prevents shareholders from transferring their shares to third parties except as permitted under the shareholder agreement. An important part of the deal for many people who create new businesses with partners is the involvement of the partner; it’s not just about starting this business – it’s about starting this business with a particular partner, or at least someone known and trusted. The transfer restriction protects shareholders from having strangers introduced into the business without their approval.
  • Permitted transfers to assist with tax planning. These are exceptions to the general transfer restriction – they allow shareholders to transfer shares for tax reasons (for example, to family trusts and corporations).
  • Right of first refusal. Also an exception to the general transfer restriction, this permits a sale to a third party as long as the existing shareholders are allowed the opportunity to buy the shares first at the same price.
  • Board composition and procedure. These rules establish who will sit on the board (and be responsible for day to day management of the company), when the board meets, etc.
  • Budget and financial statement preparation.
  • Pre-emptive rights. These rules give shareholders the right to participate in new offerings of shares in the company.
  • Repurchase rights. These rules give the company the right to buy shares back from shareholders in certain situations: death, permanent disability, bankruptcy, breach of agreement, and so on.
  • Vetos over important decisions by the company. These rules can be structured in different ways, but the general concept is to give shareholders holding more than a specified aggregate interest the right to make important decisions – like hiring and firing, financing or selling the company, and so on. (Obviously, in a two equal shareholder company a different approach is needed to resolve disputes. An approach occasionally used in that case is a ‘shotgun clause’ – the right of each shareholder to propose a price at which the other shareholder is required to sell his shares, or buy the other’s shares. Basically, a fistfight – but with wallets).
  • Drag-alongs and tag-alongs. A drag-along, also called a carry-along, is the right of a specified majority of shareholders (for example, 2/3) to require the remainder to join with the majority in a sale of their shares to a buyer of the company. A tag-along (also called a piggy-back) is a right of a shareholder to piggy-back on a sale by others (typically, when the sale is of more than a specified % of the total) of their interest in the company.
  • Arbitration or mediation clauses. These clauses set out procedures to resolve disputes.

These are just a few of the common clauses that can be included in a shareholder agreement and their inclusion will obviously depend on the specific circumstances surrounding the company being formed.

If you’re considering started a business and would like assistance as to the appropriate business structure and the structuring of a shareholder agreement contact us on 1300 36 32 10, or email hello@dylaninns.com.au.