A shareholders agreement sets out the rights and obligations between the shareholders of a company. It is normally signed by the shareholders and the company itself. It is separate from the company's constitution.
Am I legally required to have a shareholders agreement?
No. If you don't have one, you will still have rights and owe obligations to the other shareholders. Your rights and obligations will be a function of the company's constitution, the Corporations Act and the general law.
You obviously do not need a shareholders agreement if you are the sole shareholder.
Why should I have a shareholders agreement?
Regardless of whether you will be a minority or majority shareholder, there are a number of reasons why you should have a shareholders agreement.
- It will protect your interests as a shareholder.
- It will ensure you are joining the venture on the same page as the other shareholders.
- It will give you certainty about the scope and extent of your rights and obligations as a shareholder.
- It will give you a single reference point to determine your rights and obligations as a shareholder.
- It will allow you to do things differently to the default position prescribed by law.
If you are a minority shareholder, there are a number of things you should look for in a shareholders agreement. For example, you may want the ability to appoint a director, you may require certain minimum rights to information, and you may want the ability to tag along with a larger shareholder if they decide to sell their shares.
Similarly, if you are a larger shareholder, you may want a first right over the other shareholders' shares, you may want to ensure that minority shareholders cannot stifle decision-making, and you may want the ability to drag along the other shareholders into a sale.
The only way to address these issues is through a shareholders agreement.
What does a shareholders agreement contain?
Broadly speaking, a shareholders agreement will explain:
- the nature and objectives of the business;
- how decisions will be made;
- when shares can be issued or sold; and
- how disputes will be resolved.
Sometimes a shareholders agreement may give you protections if you will be a director of the company, but often they will be dealt with by a separate deed of indemnity.
A shareholders agreement should be prepared specifically for the company concerned, otherwise it may not address the issues that need to be addressed (either appropriately or at all). There are a number of reasons why you should be wary of a shareholders agreement template.
You can read more about what is covered by a shareholders agreement here.
How is a shareholders agreement different to the company's constitution?
A shareholders agreement is a physically separate document from the company's constitution.
A shareholders agreement can be modified in accordance with its terms, whereas a constitution can be changed by a special resolution. A special resolution requires the giving of sufficient notice and the approval of 75% of the shareholders entitled to vote. Sometimes the shareholders would prefer that changes be permitted with a different (higher or lower) approval threshold, and that can only be done with a shareholders agreement. Note that the rules around shareholder oppression can prevent some changes from taking effect.
Under the Corporations Act, all shareholders are entitled to receive a copy of the company's constitution. In contrast, a shareholders agreement will only be available to the people who have signed it. This can be important where the parties have decided that some shareholders should not be a party to the shareholders agreement. (It is not uncommon for a group of shareholders to decide that they be bound by a set of rules that applies independently of the rules governing the relationship between all shareholders.)
How are inconsistencies dealt with?
Ideally, the constitution should be amended at the same time as preparing the shareholders agreement to ensure there is no inconsistency. As a back-stop measure, a shareholders agreement will normally state that it will prevail to the extent of any inconsistencies with the constitution.
When should a shareholders agreement be signed?
The shareholders agreement should become effective at the instant you become a shareholder. Two problems with dealing with it later are:
- your bargaining position may erode over time;
- it runs the risk of being forgotten, and a dispute could arise before the agreement is signed.
Where do I find out more?
For more information on shareholders agreements, we would encourage you to download our comprehensive guide.