Shareholders Agreement: What You Need to Know

Shareholders Agreement: What You Need to Know

Commercial Law

A shareholders agreement is a contract between the shareholders of a company that sets out their rights and obligations, how the company will be managed, and how certain decisions will be made. It is a useful tool to protect the interests of shareholders, especially minority shareholders, and to prevent or resolve disputes.

Why do you need a shareholders agreement?

A shareholders agreement can provide many benefits for a company and its shareholders, such as:

  • Clarifying the roles and responsibilities of shareholders and directors.
  • Establishing the procedures for appointing and removing directors.
  • Defining the voting rights and powers of shareholders and directors.
  • Setting the rules for issuing, transferring, and valuing shares.
  • Creating mechanisms for resolving disputes and deadlocks.
  • Regulating the dividend policy and distribution of profits.
  • Protecting the intellectual property and confidential information of the company.
  • Restricting the competition and solicitation of customers, employees, and suppliers by shareholders.
  • Planning for the exit or succession of shareholders.

What are the key provisions of a shareholders agreement?

A shareholders agreement can cover a wide range of topics, depending on the nature and needs of the company and its shareholders. However, some of the key provisions that are commonly included in a shareholders agreement are:

  • Pre-emptive rights: These are the rights of existing shareholders to purchase new shares before they are offered to third parties. This can help shareholders maintain their ownership and control of the company and prevent dilution of their shares.
  • Drag-along rights: These are the rights of a majority shareholder to compel the minority shareholders to sell their shares to a third party buyer, on the same terms and conditions. This can help the majority shareholder achieve a sale of the entire company and avoid being left with minority shareholders who may not agree with the buyer.
  • Tag-along rights: These are the rights of a minority shareholder to join the sale of shares by a majority shareholder to a third party buyer, on the same terms and conditions. This can help the minority shareholder avoid being left behind in a company that may change its direction or lose its value after the sale.
  • Shotgun or buy-sell clause: This is a clause that allows a shareholder to offer to buy out another shareholder at a specified price. The other shareholder can either accept the offer or buy out the offering shareholder at the same price. This can help resolve a deadlock or a dispute between shareholders who want to exit the company.
  • Dispute resolution clause: This is a clause that sets out the process and methods for resolving any disputes that may arise between shareholders or between shareholders and directors. This can help avoid costly and lengthy litigation and preserve the relationship and reputation of the parties.

What are the different controls that can be placed on voting?

A shareholders agreement can also specify the different controls that can be placed on the voting rights and powers of shareholders and directors. Some of the common types of voting controls are:

  • Majority vote: This is the vote of more than 50% of the shares or votes present and voting at a meeting. This is the default rule for ordinary resolutions under the Corporations Act 2001 (Cth).
  • Special majority vote: This is the vote of more than 75% of the shares or votes present and voting at a meeting. This is the default rule for special resolutions under the Corporations Act 2001 (Cth).
  • Unanimous vote: This is the vote of 100% of the shares or votes present and voting at a meeting. This is often required for matters that affect the fundamental rights or interests of all shareholders, such as amending the shareholders agreement or the constitution of the company.
  • Veto right: This is the right of a shareholder or a director to block or prevent a decision or action by the company or the board, regardless of the majority vote. This is usually granted to minority shareholders or independent directors to protect their interests or ensure compliance with the law or the shareholders agreement.
  • Weighted vote: This is the vote that is assigned a different value or weight based on the shareholding or the position of the voter. This can give more influence or power to certain shareholders or directors over others.

Conclusion

A shareholders agreement is an important document that can help a company and its shareholders to operate smoothly and efficiently, as well as to protect their rights and interests. A well-drafted shareholders agreement can address the specific needs and expectations of the parties, as well as anticipate and prevent potential issues and conflicts. A shareholders agreement can also complement and supplement the existing legal framework of the company, such as the constitution and the Corporations Act 2001 (Cth). Therefore, it is advisable for any company that has more than one shareholder to have a shareholders agreement in place.