Shareholders’ Agreement

Shareholders’ Agreement lawyers

Our office is conveniently located in Sydney: 801, Level 8/100 William St, Woolloomooloo NSW 2011 (view in Google Maps). Our Sydney Shareholder Agreement solicitors work with business owners Australia wide.

Shareholders’ Agreements

Every Shareholder’s or company director’s requirements are different.

From negotiating the number of shares to clarifying  rights and obligations of the shareholders, our expert lawyers are trained to address a variety of complex legal issues.

Shareholders’ Agreements are a major area where small business owners frequently encounter difficulties in corporate law.

Navigating Shareholders’ Agreements can be a complex undertaking, involving issues such as ownership rights, dividend distributions, and shareholder voting rights. It’s important for small business owners to carefully consider these matters and ensure that their agreements accurately reflect their intentions and protect their interests. Failing to do so can lead to disputes and legal challenges down the line.

Why you need a legally drafted Shareholders’ Agreement

It is important to have a legally drafted Shareholders’ Agreement in place to protect your business interests and avoid disputes with shareholders. Failure to do so can lead to legal challenges and other issues down the line, which can be costly and time-consuming.

We can help ensure that your Shareholders’ Agreement accurately reflects your intentions and protects your interests, giving you peace of mind and protecting you from potential lawsuits and other legal issues.

Our expertise in corporate law can help you navigate the complexities of Shareholders’ Agreements and other legal requirements, allowing you to focus on running your business.

Shareholders AgreementThe team of corporate lawyers at Progressive Legal are trained to provide advice and representation on a wide range of legal issues that often arise between shareholders.

Article – top 10 things to consider in your Shareholders’ Agreement 

Most template shareholders’ agreements won’t provide you enough legal protection

When drafting a tailored Shareholders’ Agreement, it’s imperative that you make sure that the interests of the company as well as the shareholders are covered properly.

This article looks at the top 10 things you should consider when drafting a tailored Shareholders’ Agreement. If you have any questions or require any assistance with drafting a Shareholders’ Agreement, our approachable and practical lawyers are happy to help protect you and your valuable business.

1. Operation and management of the company

It’s vital to consider how your company will be operated. Generally, a Shareholders’ Agreement will confirm that directors will be responsible for the overall management and operation of the business of the company, however, you should also consider whether the board will have the right to delegate such power to a committee or a managing director.

If a managing director is in control, you should set out the scope of their role and responsibilities. The Shareholders’ Agreement should also set out the duties and obligations of the directors as well as the expectations of and obligations on the shareholders.

If a shareholder, or a key person associated with a shareholder is required to work in the business the shareholders’ agreement should deal with this situation. Otherwise, you could have a situation where a shareholder stops working and is still entitled to retain their shares.

2. The Board of Directors and rights to appoint another Director

It is important to clarify how directors are to be appointed to the Board of Directors and any rights to remove and replace those directors. Sometimes each shareholder will have the right to appoint one director, and in other cases, only those majority shareholders have the right to appoint a director.

You should also consider whether the Board of Directors should have the right to appoint independent directors or alternative directors from time to time. There may be general limitations on the power of the Board of Directors, such as, requiring two directors to approve bank transfers over a certain amount or a general manager to oversee the financial operations of the business.

3. Share transfers (Pre-emptive rights and drag along / tag along)

You should also carefully consider what restrictions (if any) you wish to place on shareholders who want to transfer their shares or exit the company. These restrictions will generally protect both the interests of the other shareholders and the interests of the company. There are a number of risks for shareholders and the company under these circumstances including dilution, competitor sales as well as sales to unknown or incompetent third parties.

The Shareholders’ Agreement should set out any restrictions on the shareholder when transferring their shares and the mechanism for determining the price of such transfer.

Generally Shareholders’ Agreements include pre-emptive rights which essentially give each shareholder the right to purchase those shares being offered to a third party. Such third-party transfers may also be subject to the approval of the Board of Directors.

If you are a major shareholder in the company and your intention is to build up that company with a view to sell it to a larger corporation, it is also important to ensure that you have the ability to ‘drag along’ minority shareholders so that minority shareholders will have to legally sell at the same sale price. We can also put in place ‘tag along’ rights to protect minority shareholders, if that is your intention.

4. Protection of the business’ interests (restraint provisions)

It’s generally recommended that restraint of trade clauses be included in the Shareholders’ Agreement to protect the legitimate interests of the company. This is particularly important when shareholders are involved in the day-to-day operations of the business and are familiar with its trade secrets and client relationships.

These generally include a restraint on shareholders which prohibits them from being engaged in a competing business, and a restraint preventing shareholders from pinching your staff or trade connections (e.g. clients, suppliers). If you have shareholders that hold shares in a company structure, you should also ensure that you include their directors or key persons involved in the business into the restraints.

5. Deadlocks and disputes

These provisions generally operate when shareholders cannot come to an agreement on a matter and as a result, the company cannot move forward and deadlock. This would generally only happen where there are two shareholders and they hold 50% of the shares each. To pass a decision both would need to vote in favour, which ends up in a stalemate.

A common method of resolving a deadlock is a “shotgun clause”, which entitles one or more of the shareholders to buy out the other at an agreed price, however, it also entitles the other shareholders to buy them out if they don’t agree to it. This then allows one party to exit and the other to move forward with the business and breaking the deadlock.

This clause should be carefully drafted so as to prevent minority shareholders from calling upon it. In those circumstances, the company then faces the risk of being left without an option except to apply to a Court for a resolution! Not ideal.

6. Meetings of the Board and Shareholders

The Shareholders’ Agreement should set out how often meetings are to take place, and notice procedures for those meetings. You should confirm that meetings can be held electronically, what constitutes a quorum and what happens if you don’t achieve a quorum (i.e. those in attendance at a second meeting could constitute a quorum).

7. Decision making

You should carefully consider how decisions are to be made in the business. A Shareholders’ Agreement should set out what voting rights each director and shareholder has at a meeting, and the required votes needed to approve a resolution.

Generally, most decisions are made by a majority, with only certain key decision usually requiring 75% or unanimous votes. Please note that some decisions of shareholders must be passed by special resolution (75%) as required by the section 9 of the Corporations Act, 2001.

8. Involuntary Exits (death or total and permanent disability)

In the event of death or total or permanent disability of a shareholder, the Shareholders’ Agreement may give the other shareholders the right to purchase the outgoing shareholder’s shares. The Agreement should also expressly address both the amount and the timing of payments for those shares.

We can also assist with what’s known as an insurance funded buy-sell agreement.

9. Defaults and consequences

The Shareholders’ Agreement should have a clause that deals with those events that trigger a default. For example, this includes a breach of the shareholders’ obligations (such as an obligation to work in the business).

When such a trigger event occurs, a Shareholders’ Agreement will generally require a defaulting party to transfer its shareholding at a valuation price to the other shareholders. You should carefully consider whether you wish to include a provision for discounting any valuations by the damage done by that defaulting shareholder.

10. Valuation of Shares

In certain circumstances, a valuation of shares will be required (such as in default or death, total and permanent disability compulsory buy-back as noted above). You should consider how the valuation price will be determined. Generally a Shareholders’ Agreement should include a fair market valuation to be calculated by an independent valuer. We also see Shareholders’ Agreements contain specific multiples by which the value of the business will be calculated.

Key takeaways

Your Shareholders’ Agreement needs to be drafted to tailor-fit the interests of your business and the shareholders. It sets out the expectations of how the company will be run and the shareholders’ involvement in the business. It can be used to prevent and manage disputes, which inevitably happen and reduce the severity or collateral damage of those disputes.

We have seen many companies and good businesses ultimately being destroyed internally through avoidable shareholder disputes that could have been resolved efficiently and quickly – if only they had a well-drafted Shareholders’ Agreement.

Business is risky enough without exposing the owners to an unnecessary risk of a poorly drafted or template document.

Video: Why is a Shareholders’ Agreement so Important to Have?

Shareholders’ Agreements FAQs

What is a Shareholders’ Agreement?

A Shareholders’ Agreement is a legally binding contract between the shareholders of a company that sets out their respective rights and obligations. The Shareholders’ Agreement will typically deal with issues such as how decisions are made, how shares are transferred, and what happens if the company is sold. Shareholders’ Agreements can be very detailed and complex documents, so it is important to seek legal advice before entering into one.

What is the purpose of a Shareholders’ Agreement?

The Shareholders’ Agreement purpose is to regulate the shareholders’ relationship and promote good corporate governance. The Shareholders’ Agreement should be reviewed and updated regularly to ensure it remains relevant and effective. The Shareholders’ Agreement should prevent shareholders from unexpectedly selling their shares or transferring their dividends, so that the original shareholders can maintain control of the company.

How to execute or legally sign a Shareholders' Agreement?

The Shareholders’ Agreement should be signed by all shareholders of the company, and witnessed. By signing the Shareholders’ Agreement, shareholders are agreeing to its terms and to act in the best interests of the company.

Should I use a free shareholders' agreement template?

Using a free shareholders’ agreement template may seem like a cost-effective solution, but it’s important to consider the potential risks and drawbacks.

Free templates may not be tailored to your specific needs and may not accurately reflect your intentions, potentially leaving you vulnerable to disputes and legal challenges down the line. They may also not be updated to comply with current laws and regulations, which can put your business at risk.

Additionally, free templates may not include all the necessary provisions for your specific business and may not address important issues such as ownership rights, dividend distributions, and shareholder voting rights.

It’s advisable to consult with a qualified corporate lawyer to draft a shareholders’ agreement that is tailored to your specific needs and provides comprehensive legal protection. A lawyer can help ensure that your agreement is up-to-date, legally sound, and accurately reflects your intentions and expectations. The initial investment in a properly drafted agreement can save you time, money, and legal headaches in the long run.

Are there different types of Shareholders’ Agreements?

Yes, there are different types or variations of Shareholders’ Agreements, as highlighted below.

Startup shareholders agreement

Tailored for startups, a startup shareholder agreement outlines ownership terms and responsibilities among shareholders, fostering a clear foundation for growth.

Nominee shareholder agreement

A nominee shareholder agreement is a legal arrangement designating a nominee to hold shares on behalf of another, ensuring anonymity while preserving ownership rights.

Small business shareholder agreement

Drafted for small businesses, this agreement defines equity distribution and operational roles among shareholders, promoting stability and collaboration.

Company shareholder agreement

Essential for any company, this agreement establishes the rights and obligations of shareholders, ensuring a transparent and harmonious corporate structure.

Shareholder subscription agreement

Outlining terms for acquiring additional shares, a shareholder subscription agreement facilitates smooth transactions and clarifies the process of subscribing to additional company equity.

Employee shareholder agreement

An employee shareholder agreement is tailored for employees holding company shares. This agreement delineates their rights, responsibilities, and how their shares align with overall company ownership.

Shareholder buyout agreement

A shareholder buyout agreement is a strategic document outlining the terms and conditions for the purchase of a shareholder’s interest, providing a clear exit strategy for both parties.

Shareholder transfer agreement

Facilitating the seamless transfer of shares between parties, a shareholder transfer agreement outlines the terms and conditions for a smooth and legally sound ownership transition.

“Incredibly professional, honest and upfront approach. Ian was thorougher with all correspondence, always available and was able to answer every question or concern in a way that I understood so I could make an informed decision.”

Carlie Barnett, Recruit & Consult

Shareholders’ Agreement lawyers

For expert advice on Shareholders’ Agreements, please get in touch with us today via phone or the contact form on this page.