A Shareholders’ Agreement is a contract between the shareholders of a company. While it is not compulsory, a Shareholders’ Agreement is good way to provide some certainty in a business relationship, and can be as detailed or as simple as you would like. Without one, you risk a dispute at some point down the track when each shareholder has a different idea of who can do what, when they can do it and how it is done. Like a pre-nup – you don’t really need one, until you need one (at which time it is too late). Shareholders’ Agreements are also popular because unlike a Constitution, they are not registered with the Companies Office, so its terms can be kept private
Typically a Shareholders’ Agreement is signed at the outset of a business arrangement, but it is never too late - they can be entered into at any time with the agreement of the shareholders. It will usually record (amongst other things):
the nature of the business,
how it will be run,
decision making mechanisms,
how many directors there will be and how they are appointed,
the role, rights and responsibilities each shareholder has,
how capital contributions or financing will be arranged & secured, and
exit strategy - what happens if one shareholder wants to sell (or if some other change or event
affects a shareholder).
Are you compatible with the other shareholders?
Perhaps the most important role of a Shareholders’ Agreement is to ensure the parties are on the same page from the outset. When preparing the agreement the parties will need to consider how the business will operate. Can you agree on the role each party will have, who will provide security for company finance or what should happen if one party does not meet their obligations? If you cannot agree now, you will find it hard to agree later.
What are my shares worth?
The Companies Act does not prescribe how shares should be valued if one party wants out, and it is not always as simple as you may think. It can be notoriously hard to agree on a timeframe, process, and the value of the shares when one party is exiting the company. Shareholders’ Agreements will often record the agreed process for when one party wants to sell their shares, reducing uncertainty and the risk of dispute.
How much control will each party have?
Shareholders own the company, while the directors manage the company. A Shareholders’ Agreement can record who can appoint directors, and what decisions the directors can make without reference to the shareholders. You might agree for example that some decisions need the approval of all shareholders, while others need a majority of shareholders, or could be made unilaterally by just one director.
Removing a shareholder / director
Your Shareholders’ Agreement might record different circumstances in which a shareholder or director can be removed. For example, if a shareholder or director has breached an essential term of the Shareholders’ Agreement, acted dishonestly or in a way that is detrimental to the business, they can be removed. This can be easier than relying on the provisions of the Companies Act, which can be limited. Need some more advice, or would you like to draft up a shareholders’ agreement for your company? Contact the team at iCLAW today.