SHAREHOLDER AGREEMENTS

2 min read

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.

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Picture of Authored By<br>Raea Khan

Authored By
Raea Khan

Director Lawyer, PBL Law Group

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Kushlan Aluwihare
PBL Law Group were fantastic. Anita from PBL worked with us closely during our property search and made the exchange and settlement process smooth and stress free. Highly recommended.
Gail Whitford
PBL handled my late mothers estate, they were very obliging and patient with any and all questions that we had, thank you to David , Sharon and the other staff that we dealt with, everyone was so easy to talk to and friendly .David came to the home where my Mother was living and helped her to get her will in order, Sharon helped us through the process of executing her wishes when the time came even doing a house call which was so much easier, thank you all so much
S M
I have experienced an excellent service from PBL (especially from Anita) during the sale of my recent property on Central Coast, and during the purchase of our current property in Sydney. Throughout many challengers, especially with the sale, Anita presented her very professional and knowledgeable conveyancer, positively solving all obstacles. "Above and Beyond" Award going to Anita!!! :-)
Amanda Reitzin
The five-star reviews are well-deserved. I needed a motion and a bylaw drawn up for urgent repairs of my strata unit and the AGM was in two weeks' time. My solicitor was friendly, efficient, knew what documents to ask for, and had all the paperwork prepared well within the timeframe. She also took the time to run through all the legalese and the different possible scenarios with me to make sure I understood. I am so glad to have found this firm and I will not hesitate to use their services again in future if the need arises.
Ricky Cooper
Anita is amazing! So attentive, approachable and communicates everything every step of the way. I have now bought and sold property with Anita and I cannot recommend her highly enough.
Ron Thomsen
Our Commercial Property conveyancing was handled very professionally. Anita’s experience and responsiveness was an asset in this transaction.
Trace M
I am so grateful for Anita Bradley from PBL Law Group helped me with this property settlement, she has went above beyond to ensure I understand everything because of our deafness. I will recommended Anita or their team. Thank you so much for all the hard work you have done for us.
Tricia Wheatstone
For almost 18 months I have been a client of Alex Ilkin. Alex is very knowledgeable and professional and has consistently provided me with thorough, honest and well set out advice, including steering my case through appeal proceedings. He always worked for my best interests with integrity and compassion. I recommend Alex and his team at PBL.