Shareholders Agreement
For many businesses, especially startups, a shareholders agreement is one of the most crucial documents. It functions as the primary framework governing the relationship between a company's directors and shareholders, clearly outlining their rights, responsibilities, and obligations. This document is frequently referenced by shareholders and directors when making significant decisions about the company’s future, making it essential for effective corporate governance.
Why You Need a Shareholders Agreement
A well-drafted shareholders agreement is crucial for minimising the risk of disputes and confusion among shareholders. Without this essential document, a company would rely on its constitution (if one exists) and the default provisions of the Corporations Act 2001 (Cth). However, a company constitution often serves as a generic template, and the Corporations Act offers only default rules. Thus, a comprehensive and tailored shareholders agreement is vital for addressing specific scenarios that may arise, ensuring shareholders have a clear and mutually agreed-upon framework to guide their decisions.
Understanding Shareholders and Their Rights
Shareholders are the owners of a company’s shares and can be either individuals or entities, such as other companies. Also known as the company’s members, their specific rights are outlined in the shareholders agreement and can vary based on the class of shares they hold.
If your company issues various types of shares, it's crucial to review both the company constitution and the shareholders agreement to understand the rights associated with each class. Typically, the company constitution will define the rights linked to each share class, including:
- Voting Rights: Some share classes may grant voting rights, while others may not.
- Dividend Rights: Certain shareholders may have priority in receiving dividends.
- Liquidation Preferences: In the event of liquidation, specific classes of shareholders may be prioritised for payment.
The shareholders agreement will further detail the general rights applicable to all shareholders, such as decision-making and information rights, and any bespoke rights related to particular classes of shares. Common share types include ordinary shares and preference shares, with preference shares often having unique rights negotiated between the company and its shareholders.
Directors and the Board
A shareholders agreement can also define the minimum and maximum number of directors and establish the process for their appointment. For instance, it may stipulate that only shareholders holding a certain percentage of shares can appoint directors or that the company’s founders retain the right to appoint a director. Additionally, the agreement should outline the circumstances and procedures for removing a director, such as in cases of fraud or incapacity due to a medical condition.
Board Meetings
Effective corporate governance relies on regular board meetings. The shareholders agreement can specify the frequency of these meetings—commonly held on a quarterly basis—while allowing for more frequent meetings if needed. It should also outline the procedure for scheduling these meetings, ensuring that all directors are fully informed and actively involved in the company’s management.
Beyond the general duties defined by the Corporations Act and common law, the shareholders agreement can impose additional obligations on directors, such as:
- Representing the interests of shareholders.
- Avoiding conflicts of interest.
- Exercising due care and diligence in all actions.
- Refraining from using their position or information for personal gain.
- Ensuring they do not cause harm to the company.
Shareholders Meetings
A general shareholders meeting involves all the shareholders of the company. The shareholders agreement should explicitly define the issues that require shareholder approval rather than just director approval, clearly outlining the roles and responsibilities of each group in the decision-making process. This ensures that critical decisions are made with the appropriate level of consensus among shareholders.
Resolving Deadlocks and Disputes
When shareholders reach an impasse on company management decisions, a deadlock provision in the shareholders agreement becomes vital. The agreement should outline detailed procedures for resolving disputes, including deadlocks between directors and shareholders. Effective mechanisms might include direct meetings, arbitration, or mediation, ensuring that conflicts are managed efficiently and the company's operations are not disrupted.
Issuing New Shares and Dividends
When issuing new shares, the shareholders agreement may require either unanimous or majority approval from existing shareholders. Typically, it is stipulated that new shares should be offered to existing shareholders on a pro-rata basis. Regarding dividends, the agreement should outline the criteria that directors must consider when determining dividend distributions, including factors such as the amount, timing, and payment method. This ensures clarity and fairness in the distribution of profits and management of share issuance.
Transferring and Selling Shares, and Takeover Offers
The shareholders agreement should detail the procedure for selling shares, including the requirement to provide written notice to other shareholders and offer them the option to purchase shares on a pro-rata basis. It should also specify the method for valuing shares, whether through a valuation formula or by an independent accountant.
For businesses seeking expert guidance on drafting or amending a shareholders agreement, NB Commercial Law provides specialised consultation services. Our team of experienced commercial lawyers is dedicated to creating tailored shareholders agreements that safeguard your company’s interests and facilitate smooth transactions.