What is a Shareholders Agreement?
A shareholders agreement is a contract between the shareholders of a company. It outlines how the company should be operated and the shareholders’ rights and responsibilities. It’s a bit like a rule book for the company’s owners, defining how decisions are made, how shares can be bought or sold, and what happens if a shareholder wants to leave or if the company changes hands.
Do You Need a Shareholders Agreement?
It’s not legally required to have a shareholders agreement in Australia, but it’s highly recommended, especially for small to medium-sized businesses. This agreement helps prevent misunderstandings and disputes between shareholders by clearly setting out everyone’s rights and responsibilities. It is easiest to put in place early in a company’s life.
How Much Does a Shareholders Agreement Cost?
The cost varies greatly depending on the complexity of the business and the agreement. It can range from a few thousand for a basic one to over $10,000 Australian dollars for complex shareholders agreements. Generally, you’d get a commercial lawyer to draft this agreement, and the cost reflects their time cost and expertise.
Are Legal Fees for Shareholders Agreement Tax Deductible?
Yes, generally, the legal fees incurred in drafting a shareholders agreement are tax deductible as “blackhole expenditure” and is deducted over 5 years. However, consulting with a tax professional for advice specific to your situation is wise.
Do All Shareholders Have to Sign a Shareholders Agreement?
Ideally, yes. All shareholders need to sign the same shareholders agreement to ensure that everyone is bound by its terms and understands their rights and obligations. Often a constitution is updated so that any new shareholders must sign the shareholders agreement, or they cannot become shareholders.
What Should Be in a Shareholders Agreement?
The most important parts of a shareholders agreement are:
- Identify the Parties: List all the shareholders and the company.
- Share Capital: Detail the share structure and any different classes of shares, and differences under the shareholders agreement.
- Decision Making: Outline how decisions will be made, including voting rights and processes.
- Director Appointments: State how directors are appointed.
- Dividend Policy: Describe how profits will be distributed.
- Transfer of Shares: Explain the process for selling shares, including any pre-emption rights, drag-along and tax-along rights.
- Leaving Shareholders: Cover what happens if a shareholder wants to leave.
- Dispute Resolution: Include a process for resolving disagreements outside of court.
- Confidentiality and Non-Compete Clauses: Add any restrictions on shareholders’ activities outside the company.
What Happens If There Is No Shareholders Agreement?
Without one, there’s a risk of disputes and confusion over decision-making, profit sharing, and other important matters. The company’s operations might be governed solely by the default rules under the Corporations Act, which may not suit your specific business needs.
Can a Shareholders Agreement Override Articles?
A shareholders agreement cannot override the company’s constitution (articles of association). Both documents should be consistent with each other. Where there’s a conflict, the constitution typically prevails.
When preparing a shareholders agreement, the lawyer preparing it should also review and update the constitution to make sure both documents are consistent.
How to Protect Minority Shareholders in Shareholder Agreement
Minority shareholders can be at significant risk of losing value in their shares unless they have protections. It is best to use a shareholders agreement for this instead of a shareholders oppression claim, and should cover:
- Include Tag-Along and Drag-Along Rights: Ensuring minority shareholders can sell their shares under the same conditions as majority shareholders, and that a minor shareholder cannot hold out on a sale event.
- Veto Powers: Granting veto rights over certain decisions, such as a founding shareholder.
- Anti-Dilution Provisions: Protecting against dilution of their shareholding.
- Information Rights: Guaranteeing access to company information and operations.
Is a Shareholders Agreement Legally Binding?
Yes, a properly drafted and executed shareholders agreement is legally binding on the parties involved. It’s enforceable under Australian law, provided it complies with legal requirements and doesn’t conflict with the company’s constitution, the Corporations Act and in some cases the Australian Consumer Law.
What is the difference between an investment agreement and a shareholders agreement?
An investment agreement details the terms of an investor’s financial contribution to a company, covering aspects like investment amount and equity stakes. A shareholders agreement, however, is a broader contract among shareholders, outlining their rights, responsibilities, and the company’s management. While the investment agreement focuses on a specific financial transaction, the shareholders agreement governs the overall relationship and operations among the company’s shareholders.
Do you need a lawyer to draft a shareholder agreement?
No, it’s not legally required to have a lawyer draft a shareholder agreement. However, it’s highly advisable to consult one. Shareholder agreements can be complex and having legal expertise ensures that all aspects are correctly addressed and the agreement complies with relevant laws.
Disclaimer: This material is produced by Cadena Legal, a NSW-registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here for advice.
