Do we need a Shareholders Agreement?

November 13, 2018

If you have chosen a company as your most suitable form of structuring, and you have more than one shareholder, you should consider negotiating the terms of, and entering into, a Shareholders Agreement.

Whilst there is no legal requirement to have a Shareholders Agreement, taking the time to do so can avoid shareholder disputes and other issues arising in the future, which could cost the shareholders time and money, as well as impact on the smooth operation of any business owned by company.

What does a Shareholders Agreement usually cover?

Some of the common things you may wish to agree in the Shareholders Agreement include:

Management of the company and reporting obligations;
Meeting frequency and decision making;
Business Plan, Budget and Financial Reports, and the process for preparing and adopting them;
The appointment and removal of directors;
Obligations of confidentiality;
Funding the company;
Dividend policies;
Mutual covenants;
Warranties;
Future exit strategies;
Pre-emption and other share transfer and encumbrance rights and obligations;
Drag along / tag along rights;
Dispute resolution;
Restraints; and
Any agreed policies.

Doesn’t the Company Constitution deal with some of these things?

Yes. If you engage a company registration service to set up your company, it will usually come with a standard form company constitution covering some of the issues.

Shareholders Agreements allow the shareholders to agree their own terms which will govern their relationship. Shareholders Agreements also deal with matters that are not often covered in the company constitution.

The terms of the Shareholders Agreement are agreed in the document to override the terms of the company constitution to the extent of any inconsistency between the two documents.

We are only at early stages, do we need a Shareholders Agreement yet?

Shareholders Agreements are generally negotiated and entered into shortly after incorporation of the company, or when a new shareholder is brought into the company if the company was only incorporated with one shareholder. This is when the shareholders are generally on the same page about the direction of the company, and each party’s obligations. This is therefore the best time to document what those intentions are, in order to prevent disputes arising at a later date.

Agreeing a Shareholders Agreement is also generally easier with fewer shareholders, purely as there are less people to satisfy. As new shareholders come into the company, it is often on the condition that they sign what is called a Deed of Accession, which will make them a party to the Shareholders Agreement and require them to comply with its terms from the moment they become a shareholder. Attempting to agree the terms of a Shareholders Agreement only when bringing in new shareholders may significantly delay the introduction of new shareholders, or deter them from acquiring shares in the company at all.

Why are the benefits of having a Shareholders Agreement?

Some of the benefits of having a Shareholders Agreement include:

Clear guidelines for the management of the company.
Protections for minority shareholders can be built into the document.
The avoidance of disputes and the prompt resolution of them if they do arise.
Effective succession when buy / sell provisions are included dealing with common triggers such as insurable events (for example, death, trauma and total and permanent disablement) and uninsurable events (for example bankruptcy, certain divisions of property under the family law act and a criminal conviction of an indictable offence).
Greater flexibility for the shareholders to agree their own terms of governance.
Smoother operation of the company.
Certainty for the shareholders.
It may be more attractive for third party financiers to lend funds.

How can we get a Shareholders Agreement?

We can assist you to draft and negotiate the terms of a Shareholders Agreement. Each party should however obtain their own independent legal advice on the terms of the document.