Protecting your Business – Shareholder Agreements
Shareholders Agreements – a must have!
A shareholders agreement is perhaps one of the most important documents a privately owned company can have.
They provide methods for:
- Resolving shareholder disputes;
- Preventing the personal circumstances of one shareholder affecting the company or other shareholders;
- Defining the powers of the shareholders; and
- Defining the procedures and limits within which the company operates.
A shareholders agreement also provides clarity and peace of mind to all shareholders about what can and cannot be done and what happens if there is a dispute and if things go wrong.
Buy Sell Agreements – another must have!
What if one of us dies?
A buy sell agreement should be entered into by all the business partners. This is an agreement whereby ‘surviving’ business partners are bound to buy out the other partner’s interest in the business should a specific event occur (e.g. death, long-term disability, trauma (i.e. critical illness)).
The agreement is often linked to an insurance policy on each partner’s life. The policy provides the surviving partners with the money to be able to buy out the deceased/disabled/departing partner’s interest.
Generally the agreement is structured in such a way that it does not matter what business structure has been used to own the business i.e. family trust, company, partnership.
Disagreements between shareholders cannot always be ended simply and amicably. A shareholder agreement will provide for a structured dispute resolution procedure for all parties to work within, making the resolution of disputes quicker and more effective. Having an agreed structure often stops conflict before it begins.
Death or divorce of a major shareholder
A business may be transferred on the death of an owner either by gifting the business via a Will, or selling the business via a buy sell agreement.
The buy sell agreement will take precedence over the Will because the business will be transferred pursuant to the contract. The agreement must identify the owner of the interest being disposed of and the type of interest disposed of (shares, units, partnership). The agreement must also specify who is to acquire the interest (business partners, key personnel).
Should a shareholder die then without an agreement in place his/her spouse or other family member could take their place. They probably would not know much about the company and may well cause problems whether intentionally or unintentionally. A shareholders agreement can prevent this by providing a way for shareholders to have a right of first refusal to purchase the deceased’s shares.
Should a shareholder get divorced then their former spouse may turn up at board meetings and cause problems out of spite. Again, a shareholders agreement can prevent this.
Sale of Shares
Without an agreement a shareholder may sell their shares to anyone. For example, in the event of a dispute they could sell them to a competitor. Personal financial difficulties may force the sale of the share to the highest bidder. Again, this may not be in the best interests of the company.
A shareholders agreement provides a right of first refusal which means that existing shareholders have the right to purchase shares in advance of anyone else. This can be to a set formula or by matching the price of an outside bidder.
Controlling finances and obligations
Your fellow shareholders may be able to enter into contracts and other commitments on behalf of the company without proper consideration to the effects they may have. This could spell disaster for the company and the other shareholders.
With a shareholders agreement in place an individual’s ability to do this on behalf of the company can be limited to an appropriate level. This will ensure all shareholders’ exposure to risk is minimised as people overstepping agreed structures will become personally liable.
In practice, this part of a shareholders agreement gives confidence to all concerned and makes for good profitable decisions within the business.
Rise Legal is an innovative law firm offering a high level of specialist legal advice in Commercial and Property Law and can advise you further regarding Shareholders Agreements.
With extensive experience working within top tier commercial law firms, with some of the country’s top commercial lawyers, and having been at the forefront of a number of Australia’s recent major commercial projects, Rise Legal’s managing director, Helen Kay, is now offering her commercial expertise to small and medium sized businesses and individuals.
Please note: “This publication is for information purposes only and does not constitute legal advice. If you have any questions about this or any other commercial legal issue, please contact Helen Kay at Rise Legal.”