The foundation of any successful business often lies in the unseen agreements that support the day-to-day operations and long-term strategies and goals for the business. A shareholders’ agreement stands out as one of the most pivotal documents that defines the essence of your business partnerships. Whether you’re just starting out or looking to strengthen your existing operations taking the time to sit down and discuss certain matters can eliminate disagreements. 

 

what is a shareholders’ agreement? 

A shareholders’ agreement is a legally binding contract between a business’ shareholders. It governs the relationship between the shareholders and specifies how the company is managed and how a shareholder can exit the company ensuring everyone involved is aligned with the business’ goals, minimising the likelihood of misunderstandings. 

 

key clauses to include in a shareholders’ agreement: 

 

voting rights and decision-making processes  

Clearly explain how decisions are made, including how many votes are needed and if a majority or unanimous agreement is required. This helps avoid misunderstandings and keeps things running smoothly. 

As a general rule the law gives an upper hand to majority shareholders and decisions can be made with a simple majority vote [i.e. 51%] however you may want to consider whether fundamental business decisions relating to financing or share issues require an unanimous vote. 

 

roles and responsibilities 

Clearly defined expectations for each shareholder’s involvement and duties within the business. 

 

share transfer restrictions  

Include pre-emptive rights and restrictions on selling shares to external parties. It is important that you have shareholders in the business who can make decisions together regarding the business. This maintains control and aligns new shareholders with the company’s values. 

It is also important to consider that as time goes by the personal circumstances of shareholders can change significantly, they might get married, have children, become unwell and this can have a huge impact on a business when the shareholder passes. You should carefully consider what happens in these scenarios and document the process now to avoid complications.  

 

dividend policies  

Set guidelines on dividend payments to manage expectations and reduce conflicts. Specify payment frequency and profit retention policies. 

 

exit strategies  

Outline various exit strategies to address scenarios where shareholders can no longer be in business together. 

The agreement may include drag along and tag along clauses which either force a minority shareholder to sell their shares in the event a majority wants to sell to a third party or give the option to minority shareholders to tag along and sell their shares with majority shareholders. 

 

dispute resolution mechanisms:  

Lay out the steps to follow when disagreements arise, ensuring quick and fair resolution. 

 

the role of a commercial lawyer in drafting a shareholders’ agreement 

Engaging a commercial lawyer ensures your shareholders’ agreement is legally sound, comprehensive, and tailored to your specific business needs. Their expertise prevents pitfalls like unenforceable clauses and missed legal protections, safeguarding your business interests and ensuring the agreement aligns with the vision for your business.  

 

we’re here to help!

If you’re seeking guidance on drafting or understanding a shareholders’ agreement, reach out to our expert legal team. You can contact us at legal@businessdepot.com.au or give us a buzz on 1300BDEPOT to discuss your specific needs further.

 

subscribe for more legal insights

If you found this article useful and you’d like to get more information on all things legal, you can sign up to our mailing box here!


 

general advice disclaimer

The information provided in this article is a brief overview of the subject matter and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however, information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision and should consult an appropriate professional before making any decision.