If you are setting up a proprietary company (Pty Ltd), you can fly by the seat of your pants and just fall back on the suggested form of corporate Constitution provided by the Corporations Act 2001 (s 141). Nevertheless, most proprietary companies wisely adopt a customised Constitution with provisions specifically tailored to their commercial context by expert commercial lawyers, particularly where complex share structures or other possible problems not adequately covered by s 141 are involved. It is also wise for proprietary companies to adopt a Shareholders Agreement, which is signed by all shareholders and provides a greater degree of detail than both the Corporations Act and the company Constitution on relations between shareholders.

Shareholders Agreements are often written so as to override company Constitutions in case of ambiguity, but because assessment of difficult questions like that also needs to consider compliance with the Corporations Act, Shareholder Agreements should be drafted by professionals who understand all the interacting factors. In Cody v Live Board Holdings Limited [2014] NSWSC 78, the NSW Supreme Court held that, even where a Shareholders Agreement provided that it should prevail over the Constitution, it was sometimes still necessary to read the two documents together.

Who needs a Shareholder Agreement?

Even for a stable business held by only a few partners or shareholders, e.g. a family company, it is often beneficial to have a Shareholder Agreement which lays out more detail than the company Constitution does, particularly on matters like disposal of shares of departing or deceased shareholders and prevention of any dilution of shareholding proportions.

However, for some companies the need for a Shareholder Agreement is even more urgent and without one the company is risking expensive litigation further down the road. History is littered with commercial partnerships based on friendship and passion for some craft or service or innovation which turn sour later and cause endless expensive litigation and uncertainty. The governance regime laid down in the Corporations Act cannot force a ‘commercial divorce’ on a shareholder who is locked in dispute with other shareholders unless the shareholder is engaging in unfair ‘oppressive’ conduct. If they are not doing so, the company may have no effective way to resolve the dispute. That’s where a well-drafted Shareholder Agreement would make everything a lot easier.

A good example of a company needing a Shareholder Agreement would be a start-up which is a collaboration between founding partners or directors, particularly where the company will have ongoing needs for development finance from shareholders or where the company has a Share Plan where shareholders progressively acquire shares for service to the company. A joint venture like a construction project would be another example. A situation like that means your company will need a Shareholders Agreement. It could define mechanisms for valuation of shares in case of dispute, procedures to break deadlocks or disputes, and even remuneration and leave of shareholders.

Shareholder Agreements may contain clauses covering –

• Which types of company decision must be unanimously agreed by shareholders and which may be agreed by a simple majority or a super-majority like 75%.
• Confidentiality of company matters.
• Any restraints on shareholders doing business elsewhere.
• Rights to maintain proportions of shareholdings in future share issues.
• Scope of company activities.
• Dividend distributions.
• Delegation powers of shareholders.
• Disposal of shareholdings of departing or deceased shareholders.
• Share Plans for employee shareholders.
• Dispute resolution.
• ‘Drag along’ provisions forcing minority shareholders to sell if a majority shareholder is doing so.
• ‘Tag along’ provisions allowing minority shareholders to sell on the same terms as a majority shareholder.
• Creation by Deed of Accession of new shareholders who are party to the Shareholder Agreement.
• Responsibilities of shareholders to the business.

These are not the only possible areas covered and the Shareholder Agreement which your company needs will be best drafted by commercial lawyers who are on top of all the complexities. Talk to Priority Business Lawyers about your company’s needs.