Shareholder Agreements are essential when setting up a company with someone else. If that “someone else” is a friend, family member or someone you trust… in some ways, it can be even more important to have a Shareholder Agreement.

What is a Shareholder Agreement?

A shareholder agreement is a staple in most companies’ legal portfolios. Even though having one is not mandatory in Australia, it is still common practice to set one up when you embark on your business venture to ensure that the company and shareholders know what to expect of each other and enjoy certain protections.  They are particularly important where external investors are or may become involved in your business.

But what exactly is the function of a shareholder agreement, and how can it help protect both you and your clients?

What does a Shareholder Agreement do?

A shareholder agreement is a private, binding contract that governs the relationship of shareholders with both the company and the other shareholders in it.  This may include, but is not limited to:

• How the company is funded and its structure;

• Who the owners, managers and directors are;

• How managers and directors are appointed by shareholders;

• How shareholders can obtain and sell shares;

• Restraints of trade - to make sure the company receives maximum benefit from the relationships, intellectual property and know-how it develops;

• Exit strategies for shareholders, and what happens if only some of the shareholders want or are offered the opportunity to sell their shares; and

• What happens in the event of a business takeover.

Avoiding bad outcomes

Usually, the importance of a shareholder agreement is highlighted when disputes arise over selling or exiting in relation to a company’s performance. No matter how good your relationship may be with other partners in your company, it is important to have these guidelines in place to ensure a smooth transaction of shares.  

Getting into a dispute about issues such as:

• Who owns what shares;

• Who get what profits;

• Who gets what voting rights; and

• The direction of the company,

without a shareholder agreement in place means that rights and obligations are less clear and/or you will need to rely on broad, generalised legal principles to resolve the dispute. This adds unnecessary stress, cost and uncertainty to an already difficult situation and can have a number of negative outcomes including:

• Your desired outcome is left to chance (or worse, doesn’t eventuate);

• Higher legal costs;

• Personal and company reputation damage;

• Loss of opportunities / capital raising (eg an investor decides to not invest while you are ‘getting your house in order’); and

• Destroying an important personal / business relationship.

These are risks that, as a company owner or investor, you don’t want to take.

Setting expectations

Another benefit of having your own shareholder agreement is that it can be tailor-made to suit your company and its specific needs and ensures that the shareholders and directors know what to expect from each other throughout the lifecycle of the company.  

Attracting more investment

Shareholder agreements also demonstrates due diligence, creates stability in your company and prevents unnecessary risk.  This not only benefits you but also helps to make investment in your business more attractive to external investors.

Do you need a Shareholder Agreement?

Shareholder Agreements are one of the best investments you can make. We can prepare or advise on you Shareholder Agreement fast and at a fixed fee. For more information on how we can help, call us on 02 9199 4563.

This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you. Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.