When and Why Do you need a Shareholders Agreement?
When and why do you need a shareholders’ agreement? Good question. Stick around and I’ll tell ya.
Hi everyone, Simon here from The Contract Company. Contracts, that’s what we do, all day every day and sometimes overnight. Lucky us.
Righto. When and why do you need a shareholders’ agreement? Well, the when.
When and Why Do You Need a Shareholders Agreement
When do you need one? I would say any time you are going into business with another person. Potentially, even if they’re family, you should have a shareholders’ agreement. Why? Well let’s get into it.
So a company issues shares, the owner of the shares are called shareholders. The issue is there’s no contract that governs the relationship between those shareholders of the shares.
And so what you want to do is you want to have a contract between the holders of the shares that govern a whole lot of things about.
How much you have to pay for the shares, when you can sell the shares, if there’s any restraints. All that sort of stuff.
And so, the only way to do that is to have a shareholders’ agreement that all current shareholders sign up to.
Deed of Accession
And when a new shareholder comes on board, they sign a deed of accession, which basically is a deed saying they agree also to be bound by the shareholders’ agreement. Does that make sense? Hope so.
So when a company’s formed, if you go and buy a company online, usually it’ll come with a constitution. Now the constitution is just the generic document that talks about how the actual company will be governed.
So it doesn’t have many specific clauses that deal with what happens with shareholders, how they sell shares, and all that sort of stuff. They’re usually pretty generic those constitutions.
There are also replaceable rules in the Corporations Act, which can help, but once again, they’re also pretty generic. So the best thing you can do is have a shareholders’ agreement that governs that relationship between all the shareholders. And then at least you or you and the other shareholders can agree exactly what needs to be in that document. Hope that makes sense.
Possible Inclusions in a Shareholders Agreement
So what should be in there? There are a whole lot of things you can have in there. Things like:
How long does it go for? Does it last in perpetuity or not?
How much are people contributing for their shares? Is that equal?
What is the process when you want to sell your shares?
What is the process for having board meetings?
Or what is the process for electing a CEO?
I think for me, the most important one is how you get out of the shareholder’s agreement, in terms of, okay, what’s the process for selling your shares? Who do you have to offer them to? What is the offer price? Is that calculated on some sort of valuation that’s determined by an independent third party? Or have you pre-agreed a valuation if you sell at certain points in time?
You can have other things in there like restraints. So if someone sells their shares and someone else in the company, one of the remaining shareholders buys their shares, then are they stopped?
Is that person who sells, are they stopped from buying shares or starting up a competing business for a set period of time in a set area?
You’re going to have all of those sorts of things in the shareholders’ agreement. I’ve probably missed out a lot. In fact, I know I’ve missed out a lot because I’ve got a whole lot of other things that can be in a shareholders’ agreement.
Yes. But one of the other key ones is a dispute resolution clause. So what happens in the event of a dispute? So if one party, one shareholder has an issue with the other shareholders, how do you resolve all those sorts of things?
So you can see that they’re quite important documents, and the rubber really hits the road with the shareholders’ agreement. I’ll tell you when, is when one person or two of the shareholders want to leave.
Disputes in a Shareholders Agreement
That’s when you really will hope you’ve got a shareholders’ agreement because that’s when the disputes will arise.
Because the disputes will be, well, how do I get out? What do I have to do to get out? Who has the opportunity to buy my shares?
Do I have to offer the shares to the remaining shareholders or can I sell my shares to a third party? And then what is the price that has to be paid? What’s the price and when is the amount payable?
See what I mean, it gets quite complicated.
So, that’s when. So when should you have a shareholders’ agreement? I think whenever you’re going into business with someone else in a company it’s wise to have one.
Why should you have one? Well, because of all those reasons I’ve listed because you can specify the exact commercial terms of the arrangement and govern exactly how it’s all going to work.
And that hopefully avoids heartache and dispute in the future. So that’s the when and why as to why you should have a shareholders’ agreement.
Hope that helps. Any questions, Simon@contractcompany.com.au, or 1800-355-455. Thanks very much.