What is a Shareholders Agreement and Why is it so Important


What is a Shareholders Agreement?

A Shareholders Agreement is a binding commercial agreement between the shareholders and the Company. It provides a blueprint for the management of a Company, the relationship between the Company and its shareholders, and the rights and obligations of the shareholders and directors of the Company.

 Why are Shareholder Agreements important?

A Shareholders Agreement supplements a company’s constitution and/or the replaceable rules set out in the Corporations Act 2001 (Cth), but it commonly goes further than both in that it will more clearly define the shareholders’ and directors’ rights and obligations in relation to:

  • How shares are issued or acquired;
  • How shares are sold or transferred;
  • The appointment or removal of directors;
  • The powers, duties and remuneration of directors;
  • What occurs on the death of a shareholder or director;
  • How directors or shareholder meetings are to be conducted;
  • Voting power for directors or shareholders at meetings;
  • How dividends are issued;
  • How a breach by a director or Shareholders Agreement is dealt with; and
  • Dispute resolution.

A Shareholders Agreement can also govern matters such as:

  • Minority shareholders’ rights in the event a majority shareholder wishes to sell their shares to a third party (eg, pre-emptive and ‘tag along’ rights);
  • Majority shareholders’ rights if they wish to sell their shares to a third party (eg, ‘drag along’ rights);
  • Resolving a deadlock between two shareholders who each own 50% of the company;
  • Shareholder funding/contributions;
  • The right of certain shareholders to unilaterally appoint 1 or more directors to represent that shareholder’s interests;
  • The Company’s structure, business plan and budget;
  • The valuation of the Company and all shareholdings; and
  • The taking out of life insurance with respect to key directors.

Advantages of a Shareholders Agreement

The key benefits of a Shareholders Agreement include:

  • Its provisions can be tailored to suit the business needs of a Company as well as the priorities and concerns of its Shareholders.
  • It is a relatively cost-effective way for the Shareholders to set out the rules for governance and management of the Company. Without a clear blueprint in place, in our experience parties are left to resolve their dispute in Court which can be costly, time consuming, and irreparably damage relationships between Shareholders. With a Shareholders Agreement in place, a dispute is more easily managed as parties have contractual rights and obligations in place.
  • It affords more flexibility to the parties as it is an agreement which can be amended in writing at any time. Conversely, an amendment of the Company constitution requires the calling of a Company meeting.

We can help!

If you need assistance in reviewing your Company’s Constitution or creating a Shareholders Agreement, Keystone Lawyers have a wealth of experience in reviewing Corporate Structures and drafting Shareholders Agreements. We can assist in protecting your needs in the event future issues arise.