If you are setting up a business and using a company as the vehicle to run your business, a common question that is asked is whether or not you need a Shareholders Agreement.
Once the company has been established, it is governed by the company constitution, the Corporations Act 2001 (Cth) and the common law. However, directors and shareholders may choose to create a Shareholders Agreement to govern the relationship amongst them within a company.
What are the benefits of a Shareholders Agreement?
Although having a Shareholders Agreement is not a compulsory or legal requirement, having a well-drafted agreement will provide advantages over the replaceable rules in the Corporations Act and the company constitution. It allows the parties to set out their rights and responsibilities and procedures to be followed in certain situations, for example, if a shareholder wants to sell their shares, and can be a very effective way to avoid litigation.
As no two companies are the same, the Shareholders Agreement can be tailored to meet your specific business requirements and structure, providing greater flexibility and effectiveness than the company constitution and replaceable rules.
The Shareholders Agreement will act as a contract between shareholders and directors and can help the parties govern their relationship and business arrangements. If a dispute arises within the company, the Shareholders Agreement can also act as a guide to determine how it is to be resolved and can potentially avoid disputes from arising given that each party will be made aware of their rights and responsibilities from the outset.
Further, adopting a shareholders agreement will enable parties to address potential governance issues before they arise.
What terms are included in a Shareholders Agreement?
Some of the important clauses to consider including in a Shareholders Agreement include:
- Details of the structure of the company
- Rights and responsibilities of shareholders and management;
- A description of each person’s involvement in the business
- Rules relating to the debt of the company, including who must contribute funds and how they are to be repaid
- Restraint of trade clause which will limit shareholders from competing with the business or soliciting clients/staff of the business
- Clauses relating to breaches
- Publicity and Confidentiality
- Rules regarding the equity of the company including allotment and transfer of shares.
- Deadlock provisions and dispute resolution clauses
- Acknowledgements and Warranties
- Rules relating to when the Shareholders Agreement can be terminated by the parties and provide a general exit strategy for members
- Provisions relating to current Dividend Distribution Policy
- (If Applicable) Salaries and Benefits
- Business Plan
For more information on Shareholders Agreements, or if you want to speak to one of our Business and Commercial lawyers about drafting a Shareholder Agreement, contact us today.