Shareholders Agreements can be vital for your business. In this article we discuss what they are and what they can do for you.
Our topical case study
William, Kate, Harry and Meghan have a very successful company that makes and distributes royal crockery called Young Royals Crockery Pty Ltd. They are all directors and shareholders of the company.
The business started out well but unfortunately, after two years, Meghan has a falling out with the others.
Meghan wants to sell her shares to Elizabeth, but the others don’t want Elizabeth as part of the company and are making it very difficult for Meghan to exit from the company.
They have also made Meghan’s position even worse by removing her as a director of the company.
What could Meghan have done to save herself from being in a situation where she wants to leave a company but can’t readily sell her shares in it and may be unable to sell them for their full value?
How could a Shareholders Agreement have helped Meghan?
If the parties in our Young Royals example had set up a Shareholders Agreement, it is likely it would have set out:
- Who are to be directors of the company and the circumstances in which they might be removed.
- How shares can be transferred, upon what terms and to whom.
- What is to happen in the event of a dispute between the parties.
In addition, a Shareholders Agreement would have detailed a host of other matters that the parties and their advisors might have chosen to include, to cover likely future events given the size and nature of the company’s affairs.
In the absence of a Shareholders Agreement the relations of the parties are governed by the company’s constitution and the Corporations Act, both of which would be unlikely to force William, Kate and Harry to agree to Meghan’s sale of her shares to Elizabeth.
What is a Shareholders Agreement?
A Shareholders Agreement is a document which sets out the rights of shareholders and directors. It allows the individual parties to know what will happen in the event of a relationship breakdown between them and the other shareholders.
A company’s constitution provides the framework for a company but are often a standard “one size fits all.” They won’t provide protection for minority shareholders, set out what happens in the event of a business relationship turning sour or adequately deal with what is to happen on the death of a shareholder.
A Shareholders Agreement is customisable to the circumstances of your business and desires of the parties involved.
When should a Shareholders Agreement be drafted?
The BEST time to put a Shareholders Agreement in place is:
- When the company is first set up;
- When shares are first acquired in the company; or
- At any point when relations are harmonious between all parties in the business.
Should I have a Shareholders Agreement?
Whilst it is not mandatory for companies to have a Shareholders Agreement, at Tetlow Legal we strongly recommend that our clients consider how a Shareholders Agreement could benefit them.
Any Shareholders Agreement will need to be customised to meet your individual needs – be it for a company, partnership or unit trust.
If you have any questions about how you can make a Shareholders Agreement work for you, contact Tetlow Legal on (02) 6140 3263 or email [email protected].