Shareholder Agreements Lawyers

Shareholder agreements are generally entered into by shareholders of private companies. To be done properly, they require careful consideration. As shareholder agreement lawyers, we consider that a well drafted shareholder agreement will address core issues such as:

• issue of new shares
• appointment of directors
• the rights and obligations relevant to a sale of shares.
• dealing with disputes
• how profit is to be distributed
• the day-to-day running of the business
• what happens when a shareholder wants to exit – this could be simply when a shareholder wants to sell some or all of his her shares, termination of employment or for mental incapacity
• succession (in the event of death)
• what constitutes a quorum of shareholders
• how various types of management decisions are to be made- for example – a majority (50%), special (75%) or unanimous (100%) vote
• where shareholders are also officeholders, how their role will work.
• Insurance requirements eg., key person insurance

There will usually be many more issues depending upon the nature of your business and the requirements of the shareholders.

Some more complex situations include:

• how capital contributed by shareholders is to be used and on the basis on which the funds are contributed
• in the case of further capital requirements, how this to be funded and if by the shareholders, on what terms?
• where finance is obtained by the company,  rules around what security will be need to are to be provided and from whom
• determining a method for valuation of the shares, which will inevitably be required down the track
• the rules surrounding the first right refusal for the shares
• non-compete clause restricting outgoing shareholders from being involved in similar businesses for a period of time

If your company has more than one shareholder, other than your spouse, then absolutely.

People often think that if they know someone well that it isn’t necessary. Experience tells us that a shareholder agreement not only resolves disputes more quickly if they arise but, more importantly, it tends to prevent disputes and otherwise difficult discussions when circumstances change – and they almost invariably do. For example something as simple as one party wanting to sell its shares can be controversial without an agreement to refer back to.

A shareholder agreement also causes the parties begin with the end in mind and pre-empt issues that may not yet be relevant. It provokes sensible discussion and a clear path forward for the business. It also typically defines expectations and sets out decision making mechanisms. Shareholders’ Agreements are thus typically fairly individual, depending on the particular business.

Prior to starting the business is the ideal time to enter into a shareholder agreement. It means that everybody will decide on important matters before the deal is done. Often  people come a short time into their business arrangement because a disagreement has arisen about a matter that could have been dealt with in a well drafted shareholder agreement.

That said, if you are running a business presently without a shareholder agreement, there is nothing to prevent you entering into an agreement, provided all the shareholders agree.

Just remember that the main purpose of a shareholder agreement is to prevent disillusion and disagreement later when circumstances inevitably change. So if you presently operate a business with more than one shareholder, when should you enter into a shareholder agreement? The sooner the better.