Shareholders Agreements

Most of the time, shareholders cooperate with each other without regard to a formal agreement. However, you need a shareholders agreement to cover problems like a dispute or a shareholder dying or losing capacity. It is far better to agree on the solution to problems while the shareholders are cooperative than to wait until a problem arises.

How useful are standard shareholders agreements?

Most shareholders agreements are based on standard formats. Solicitors generally have one or two favourites, and many can be found on the Internet. Usually, solicitors do no more than insert the names and addresses of the parties and the company into a standard agreement. However, this approach can lead to a document that is not tailored to the needs of the shareholders, or worse, that fails to provide the proper mechanism to resolve disputes – after all, once it has been signed and filed away, a shareholders agreement will often only be looked at if there is a subsequent disagreement between shareholders.

A “standard” shareholders agreement is of little use if it concentrates only on things like holding company meetings and preparing accounts of the company, rather than setting out what needs to happen if something goes wrong in the running of the business or in the event of a disagreement.

What should be covered in a shareholders agreement?

With the assistance of an experienced lawyer, the shareholders should discuss and agree on how the shareholders agreement should cover the following points.

• What decisions need to be unanimous, and what decisions can be made by a majority?
• What happens if a shareholder dies or becomes incapacitated?
• What happens if a shareholder wants to leave?
• What happens if a majority wish to evict a shareholder?
• Dispute resolution.
• If a shareholder leaves, what restrictions are placed on:
  • Poaching clients.
  • Poaching staff.
  • Setting up a competing business nearby?

What if a shareholder wishes to withdraw?

This is probably the most important issue to cover in a shareholders agreement. The goal should be that a shareholder can leave if they wish and be paid out an agreed value for their shareholding. If possible, the shareholders agreement should be able to determine the amount to be paid and when it should be paid, without any dispute.

Most shareholders agreements skirt around this topic by simply inserting a right of first refusal. These clauses say that a shareholder who wants to leave can sell their shares to third party provided they first offer them to the existing shareholders at the same price. No third party will agree to buy into a private company if the existing shareholders do not want them. This means that the outgoing shareholder is at the mercy of the remaining shareholders. Accordingly, these clauses are completely useless and give no help to the parties in sorting out their problems when a shareholder wishes to leave.

Again, you cannot assume that one size fits all. The issue should be carefully discussed, so that appropriate clauses can be put in the shareholders agreement.

For more information  contact Tim Somerville  or Andrew Somerville on (02) 9923 2321.