So you have, or you want to put in place, a Shareholders Agreement and you want to know who has the power to make all the important decisions in the company? Fair enough. It’s always good to fully understand what’s going on.
Short Answer: the party (or parties) that have the power to make the important decisions in the Shareholders Agreement is the party that really controls the company (because this party can then decide what the company will or won’t do.) Generally there will be a clause in a Shareholders Agreement that sets out a series of ‘important decision’ that can be made on the passing of a certain type of resolutions (more on this below). Also see the table below for an example of a clause listing ‘important decisions’.
Shareholders Agreements and Important Decisions
A shareholders agreement is an agreement between shareholders (as the name suggests). It is a contract and following the principles of contract law the parties to a contract can agree anything they like (as long as it isn’t illegal.)
Ok so how does that help me? Well under a shareholders agreement there will generally be a clause like you see in the table below. This clause will set out certain activities that the company cannot undertake unless the “Required Majority” agree. We use the phrase “Required Majority” but your shareholders agreement may use a different term. It may even say, confusingly, by ‘Special Resolution’.
We say ‘confusingly’ because a ‘Special Resolution’ made under a shareholders agreement may not need to be passed by a 75% majority (which is the percentage amount stipulated under the Corporations Act), because, as we mentioned above, a Shareholders Agreement is a contract between the shareholders and as such the shareholders are free to agree what they like (as long as it isn’t illegal) and so the shareholders could agree that in their Shareholders Agreement a ‘Special Resolution’ can be passed by a different percentage (i.e it could be lower than 75%, but it could also be higher, say 80%)!
So the key to wielding power in a company is that you can set out in the Shareholders Agreement what percentage is required for a resolution to be passed by the “Required Majority”. On that basis, whoever has the power to pass a resolution by a ‘Required Majority’ therefore basically controls the company, because that party will be able to make any of the important decision listed in the shareholders agreement by themselves (see the table for an example of decisions that can be made).
We say that party ‘basically’ controls the Company because there are some things that will still require a Special Resolution under the Corporations Act (i.e. a 75% majority of directors / shareholders as required under the Corporations Act – see dot points below).
Special Resolution under the Corporations Act
Under the Corporations Act there are certain matters that can only be passed by Special Resolution. A Special Resolution is defined in the Corporations Act and is passed where 75% or more of the Directors or Shareholders agree. Those matters that must be passed by Special Resolution include the following (there are others as well):
- adopting a company constitution after registration
- converting ordinary shares to preference shares
- different dividend rights
- applying for a company to be wound up by a court
- modifying or repealing the company constitution
- changing the company’s name
- varying (and cancelling) share class rights
- issuing bonus, partly-paid, preference and redeemable preference shares
- applying for a company to be wound up voluntarily.
However whilst there are matters under the Corporations Act that must be attended to by way of Special Resolution (i.e. those items listed above) the shareholders in a company can agree other matters that need a certain level of approval (for example those items in the table below).
If you are the majority shareholder – say you own 60% or more of the shares – you want the ‘Required Majority” percentage that is agreed to in the Shareholders Agreement to be equal to or less than your percentage shareholding (i.e. 55% or 60%) as this means you can make important decisions on your own.
If you are a minority shareholder – say you own 30% of the shares – you want the “Required Majority” percentage to be as high as possible so that 1 party cannot make a decision without your agreement (i.e. 71% or more) as this means that your agreement is needed before an important decision can be made.
If you would need help to ensure that you either have the appropriate basis to wield power, or you want to ensure that someone can’t wield all the power without your consent the please get in touch with us.
The Company may not take any action or pass any resolution in respect of any of the following matters unless the action or resolution has been approved by the Required Majority of Shareholders present and entitled to vote at a meeting of the Company except to the extent otherwise required by law:
- (remuneration and bonuses) increasing:
- the annual remuneration payable to a Director of the relevant Group Entity; or
- the bonus being paid to a Director of the relevant Group Entity;
- (securities) issuing or allotting or granting any right to issue, allot or acquire securities of any Group Entity;
- (Constitution) varying the Constitution or adopting a new Constitution;
- (borrowings) authorising any Group Entity to borrow or accept a financial accommodation of more than $[insert amount];
- (encumbrances) creating any Security over the assets or undertakings of any Group Entity;
- (guarantee) giving or entering into any guarantee, indemnity, letter of comfort, performance bond or other Security, or assuming any liability, for or on behalf of any person other than a Group Entity in respect of an amount which is more than $[insert amount];
- (acquisitions and disposals) acquiring (including by lease or licence) any business or securities or disposing (including by lease or licence) of any business or any securities in or held by any Group Entity, in each case in excess of $[insert amount];
- (agreements between Company and Shareholder) concluding or entering into any agreements or contracts between the Company and any one or more of its Shareholders, or a Shareholder’s Subsidiary or Related Body Corporate;
- (assets) arranging for any Group Entity to sell or buy any assets (or more than one asset in a series of transactions), either tangible or intangible, having a value of more than $[insert amount];
- (winding up) taking any step to dissolve or wind up the Company, appoint a receiver or receiver and manager (or any similar officer) of the whole or any part of the business or assets of any Group Entity;
- (capital expenditure) authorising any Group Entity to incur capital expenditure of more than $[insert amount] in a financial year;
- (change in nature of business) ceasing, or materially altering the scale of operations of, the Business or commencing any material new business or operational activities other than the Business at the date of this Agreement except in accordance with any business plan of the Company as approved by the Directors;
- (reorganisation event) undertaking or undergoing a reorganisation of the Group or a Group Entity including any consolidation or sub-division of any securities of any Group Entity;
- (finance and operating leases) authorising any Group Entity to enter into any finance or operating lease (or more than one finance or operating lease in a series of transactions) costing more than $[insert amount] annually or $[insert amount] in aggregate;
- (material contracts) authorising any Group Entity to enter into, terminate, amend or vary a contract, lease or other arrangement involving expenditure, revenue or the incurrence of liabilities in excess of $[insert amount] in aggregate or $[insert amount] in any financial year or having a term in excess of one year;
- (loans) giving a loan, credit or other financial accommodation to a person of more than $[insert amount] except in the ordinary course of business;
- (financial assistance) giving a loan or other financial assistance to a Director or an associate of a Director of a Group Entity or varying the terms of a loan or other financial assistance previously given to a Director or an associate of a Director of a Group Entity;
- (partnerships and joint ventures) authorising any Group Entity to enter into, terminate, amend or vary a partnership, profit sharing arrangement or joint venture;
- (insurance) amending or varying the insurance cover in excess of $[insert amount] over any Group Entity or the Business;
- (litigation) instigating or settling any litigation, arbitration or other proceedings involving a Group Entity when the aggregate amount claimed is in excess of $[insert amount] (except instigating claims against bad debtors in the ordinary course of business);