What is a Shareholders Agreement?

What is a Shareholders Agreement?

A shareholders agreement is a written contract to reflect the agreement that shareholders have reached in regard to their:

  • Relationship with each other.
  • Business arrangements.
  • Rights.
  • Responsibilities.
  • Liabilities.
  • Protection of interests.

The shareholders agreement regulates matters that are not covered within the company’s constitution. The company’s constitution and the shareholders agreement work in conjunction with each other. Unlike the constitution, the shareholders agreement is not compulsory, but it is advisable to have one.

What should be included in a shareholders agreement?

The agreement contains specific information in regards to shareholders and helps set out what is expected and what to do if conflict arises. Some of the information included is:

  • who can be a shareholder;
  • who can serve on the board of directors;
  • shareholder contributions at commencement;
  • what happens if a shareholder passes away or is permanently impaired and unable to continue being a shareholder;
  • what happens if a shareholder declares bankruptcy; has their tenure terminated or resigns;
  • the value of the company’s shares;
  • who can or will be required to purchase company shares if a shareholder leaves and how much would the shares be to purchase;
  • confidentiality obligations;
  • weight of votes for each shareholder;
  • what happens if a dispute between shareholders cannot be resolved;
  • restraint of trade;
  • whether there should be a compulsory retirement age, and if so, how old?

What are common problems that can arise?

Unfortunately, like most agreements and contracts that are drafted to bind certain people, a shareholder agreement is drafted to bind the current shareholders. A certain amount of foresight is usually used in regard to potential situations, but not all situations would be accounted for.

Some of the common problems are:

  • When new shareholders are appointed into the existing company, they need to agree to be bound by the same shareholders agreement that the other shareholders have agreed to.
  • The terms that are written into the shareholders agreement cannot limit the powers given to them by the Corporations Act. The Corporations Act trumps the agreement.
  • Restraint of trade clauses can be unenforceable.
  • Not all situations that can occur are covered, which can lead to a conflict situation between the shareholders.

It is important to seek legal advice from a corporate lawyer if you intend to create or enter into a shareholders agreement.

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