Shareholders Agreements

Publications > Shareholders Agreements - issues for consideration

 

Shareholder Agreements are contracts that regulate the rights and obligations of Shareholders (Members) of a company.  Unlike a Constitution or the Replaceable Rules as defined by the Corporations Act 2001 (Cth) these agreements are not mandatory.  However, on incorporation many Shareholders choose to regulate the rights and obligations in addition to controlling various aspects regarding the management of the company by entering into a Shareholders Agreement.

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Matters that aren't generally regulated by a Constitution

 

Shareholders Agreements generally regulate and control matters on which a Company's Constitution (or the Replaceable Rules) as the case, may be are silent.  Shareholders Agreements may include provisions relating to:

confidentiality – obligations on the parties;
dilution of a Members interests – provisions requiring a certain Members level of interest in the company to be maintained at a certain level;
dispute resolution mechanisms;
Director's meeting procedures;
dividend distribution policy – for the distribution of profits;
exit strategies - agreement to sell their shares on the occurrence of certain events such as death, trade sale, an initial public offer is made by the company to list on the Australian Stock Exchange (ASX);
financing policy – the way that the company is to be financed including the obligations of the Members to invest further equity or loan funds to the company;
operating procedures for almost any part of the company's operations from budgeting and accounting to the way in which directors meetings are conducted and minutes recorded;

objectives of the company - specify and limiting the business activities of the company
obligations and rights of shareholders in certain circumstances;
protection of any minority shareholder rights;
shareholder loans - requirements and terms and conditions for any shareholder loans that may be made by shareholders and Directors;
restraint of trade on directors and shareholders;
rights to appoint directors  - a shareholder's right to appoint directors and the number of directors;
pre-emptive rights to acquire another Members shares in the event that one member wishes to sell (for whatever reason);
warranties by the shareholders;
voting in certain situations involving major decisions.

A Shareholders Agreement is way to regulate the rights and obligations (and importantly to communicate expectations) of Members as practice shows that many companies fail because the Members expectations are not aligned.

 

Perceptions of differential value of sweat equity

 

Experience has shown that a great source of conflict can arise in start-up companies without Shareholders Agreements where the expectations of parties obligations differ.  In other words where one party thinks the other is getting a "free ride". 

 

If the parties are receiving 'sweat equity' and the exact rights and obligations are undocumented, then conflict may arise when one party values their own contribution at more than the others, or one party fails to contribute to the extent that they were 'supposed to'.

 

This issue becomes particularly problematic in two situations:

	Where things are going particularly well (consequently one party wants a greater piece of the action); and
	Where things are going badly (where one of the parties wants to withdraw from the relationship).

Given that generally such agreements are enforceable, a well drafted Shareholders Agreement can go a long way towards the minimisation of conflict between the members.

 

 

Malcolm Burrows B.Bus.,MBA.,LL.B.,GDLP.,MQLS

Associate

 

Rostron Carlyle has drafted many Shareholders Agreements for its clients. Should you need assistance to document and fully consider your rights and obligations, contact one of the Solicitors mentioned above.

 

"The information contained in this article is general in nature and cannot be regarded as anything more than general comment.  Readers of this article should not act on the basis of this comment without consulting one of Rostron Carlyle's legal practitioners who will consider their particular circumstances".

 

Other articles in the corporate law series include:

 

	Sciacca v Tzvetkoff and BT Projects
	Strict compliance with the Corporations Act required for Minutes to be evidentiary (Lessons from Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287);
	Directors Duties in the Corporations Act 2001 (Cth)
	Format requirements for minutes of directors meetings

 

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