[Updated 26/09/2024 by Natashia Blank]
When starting a company, it’s easy to overlook the importance of formal agreements between shareholders. However, having a shareholders’ agreement in place is crucial for protecting both the company and its shareholders from disputes later down the road.
In this article, we’ll explore what a shareholders’ agreement entails and why it is an essential business tool for long-lasting stability.
Is a Shareholders’ Agreement Necessary?
Yes, putting a shareholders’ agreement into place when times are good and when everyone is in agreement is prudent in managing the shareholder relationship.
It is too late to try and record verbal agreements and negotiate the terms of the relationship when things have soured and parties have become bitter.
What is a Shareholders’ Agreement?
A shareholders’ agreement is a legally binding document that outlines the rights, obligations and limitations of shareholders in the company.
The process of developing a shareholders’ agreement encourages all shareholders to agree on setting clear expectations and protocols to reduce the risk of costly legal disputes arising later.
Do All Shareholders Have to Sign a Shareholders’ Agreement?
A shareholders’ agreement should be executed by each shareholder. This ensures there is a unified understanding and commitment by all parties of the rights and obligations that govern the shareholder relationship.
Can a Shareholders’ Agreement Be Amended in the Future?
Yes, as long as there is a clause that outlines how the shareholders can agree to varying the terms of the shareholders agreement in the future.
Components of a Well-Written Shareholders’ Agreement
There are several key considerations to consider including in a shareholders’ agreement, but at the bare minimum it should include the following items.
How Shareholders Make Decisions
This may identify key decisions that require unanimous or majority shareholder approval, such as capital raising or the sale of significant assets.
What Happens if there is a Deadlock in a Decision
The agreement should state what happens when shareholders disagree. There must also be a plan around whether an external advisor will be involved.
If Shareholders are Required to Fund the Business
Do shareholders need to fund the business by equity or loan? Will interest be paid on any loan made by a shareholder? What will happen if one of the shareholders is not able to provide the requested funding?
Buy-out Provisions and Exit Strategies
The shareholders’ agreement should establish a procedure for when and under what conditions a shareholder can transfer, sell or assign its shares.
It is also common for an agreement to contain a “pre-emptive rights” clause to prevent a shareholder selling shares to a third-party before providing existing shareholders a first right to purchase.
What Happens if there is No Shareholders’ Agreement
Disagreements among shareholders can significantly impact the operational success of a company, ultimately affecting the value of its shares.
This risk is amplified in the absence of a shareholders’ agreement, which leads to several critical issues, including:
- Lack of Clear Dispute Resolution Mechanisms – This can result in costly legal disputes regarding how to address disagreements. This may also result in an oppression proceeding.
- Unrestricted Share Transfers – Without restrictions, a shareholder will be free to sell its share to any third-party, which can disrupt the company’s direction.
- Potential Loss of Control for Minority Shareholders: Key decisions may disproportionately favour majority shareholders, diminishing the influence of minority stakeholders.
- No Agreed Exit Strategy or Share Valuation Processes: This uncertainty can complicate matters for shareholders wishing to exit the company.
- No Deadlock Resolution Processes: This can hinder decision-making and progress.
In summary, a shareholders’ agreement is essential for mitigating these risks and ensuring the smooth operation of the company.
If you would like to discuss whether you need a shareholders agreement you can contact us on (07) 5444 1022 or speak with one of our trusted Litigation Solicitors.
Disclaimer: The information contained in this newsletter is provided for informational purposes only and should not be construed as legal advice on any subject matter. Readers should not act or refrain from acting on the basis of any content included in this newsletter without seeking appropriate legal or other professional advice. The content of this newsletter contains general information and may not reflect current legal developments, verdicts, or settlements. We expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this newsletter.
