If your company has (or will have) more than one shareholder, you should consider having a shareholders agreement. This article explains why and answers a few other frequently asked questions.
1. Are you legally required to have a shareholders agreement?
No. If you don't have a shareholders agreement, the main sources of your rights and obligations will be your company's constitution, the Corporations Act and the common law.
If you don't have a shareholders agreement, you will still have various rights and obligations as a shareholder and/or director. For example, if you are a minority shareholder, you will still have protections against oppression. Also, your constitution will contain a number of rules about how the company is intended to operate.
It's just that the Corporations Act, shelf company constitutions and the general law were not developed with your specific circumstances in mind. Therefore they may not deal with issues that are important to you, either in the way you would like, or at all.
2. Why should you have a shareholders agreement?
Companies adopt shareholders agreements for several reasons, including:
- They want certainty about what will happen in various circumstances not covered in a standard 'shelf company' constitution.
- They wish to deal with things differently from the way they are addressed in the constitution or under the Corporations Act.
- They wish to address things that aren't covered by the company's constitution or the Corporations Act. (For example, investors and other minority shareholders might want specific protections.)
- They like the convenience of having their key rights and obligations set out in a single document.
Download your free Shareholders Agreement Guide here to learn all you need to know about shareholders agreements.
3. Why not just change the company's constitution?
There are lots of things commonly found in a shareholders agreement that you could include in the company's constitution. However people often choose to use shareholders agreements, rather than amending the company's constitution because:
- a constitution can only be changed by a special resolution of shareholders (75%), whereas people may often want to allow changes with the agreement with some other proportion of shareholders (higher or lower); and
- Although shareholders agreements usually relate to the rights and obligations of all shareholders in the company, sometimes key shareholders may want to agree between themselves how some issues in the company will be dealt with but don't want that agreement with all shareholders. The constitution applies to all shareholders, and is available to all shareholders, whereas a shareholders agreement can apply to (and be made available to) as many, or as few shareholders as you like.
4. What types of things does a shareholders agreement cover?
A shareholders agreement usually will cover a range of areas relevant to the overall operation and ownership of the company, such as:
- the nature and objectives of the business;
- how decisions will be made;
- when shares in the company can be issued or sold; and
- how disputes will be resolved.
Although this may sound simple, shareholders agreements are usually fairly detailed documents as they cover a range of different scenarios.
5. Is there a standard template?
Yes and no. 'Yes', because you will be able to find templates online. 'No', because none of those templates have been prepared with your business in mind. Consequently, if you use a shareholders agreement template without taking it any further the document is unlikely to give you the rights and protections you might need or want, and may do quite the opposite.
An agreement that works well for one group of shareholders in one company may be totally inappropriate for another.
The contents of a shareholders agreement will vary depending on a range of considerations, including the size of the company, the nature of its business, the history of the business (for example, whether it is a start-up or an established venture), the nature and value of the company’s assets, the age of the shareholders, the level of participation of individual shareholders in the company’s management, and the capacity of individual shareholders to buy each other’s shares in the event of a disagreement.
The discussion necessary to prepare and implement a shareholders agreement is invaluable in terms of avoiding problems later. The process forces people to collectively put their minds to various different scenarios, negotiate agreement outcomes/processes on what happens if those then hypothetical situations ever occur, making it far less likely there will be conflict if the situation ever happens.
Everyone will be starting off on the same page.
6. Can they be used for trusts, partnerships or other arrangements?
Technically, no. This is because a shareholders agreement is a document specifically created for companies.
However there are equivalent (but different) types of documents for different legal structures. For example, participants in a trust might have a unit-holders agreement, or participants in a venture with a variety of companies and trusts might have an over-arching co-venturers agreement.
Regardless of the legal structure you are using, if your business has or will have more than one owner, you should consider discussing and agreeing how the various issues will be dealt with before they happen. Having an agreement regulating the rights and obligations between the stakeholders in advance of disagreement/conflict arising is well worth the effort and cost.