A shareholders agreement sets out how co-owners of a company will run it, fund it, make decisions, and part ways.
The company's constitution or the replaceable rules in the Corporations Act 2001 cover the basics. They do not deal with most of the questions that cause disputes between partners.
Agree on those questions at the start, while everyone is on good terms.
The rules that apply without an agreement
Every company is governed by a constitution, by the replaceable rules in the Corporations Act 2001, or by both.
A constitution can adopt all, some or none of the replaceable rules. Where it is silent on a matter a replaceable rule covers, that rule applies.
A constitution binds the company, its members, directors and secretary.
To adopt or change a constitution after registration, members must pass a special resolution, which needs at least 75% support.
These rules are general. They are not written for your business or your partners.
What it should cover
- Who the directors are, and how each shareholder can appoint one.
- Decisions that need the agreement of all shareholders or a set majority, such as borrowing, issuing new shares, or selling the business.
- How the company will be funded, and what happens if a shareholder does not contribute.
- What each shareholder will do in the business, and how they will be paid.
- How profits will be paid out.
- Restrictions on selling shares, including a first right for the other shareholders to buy.
- What happens if a shareholder dies, loses capacity, becomes bankrupt, or leaves the business.
- How shares will be valued when one shareholder exits.
- Drag along and tag along rights on a sale of the whole company.
- Restraints on competing with the company.
- How disputes will be resolved, such as negotiation, then mediation.
The questions to settle now
Before you sign, each partner should answer these in writing.
- If one of us wants out, who buys their shares, at what price, and how is it paid?
- If one of us dies, does the family keep the shares, or do the others buy them?
- If we cannot agree on a major decision, what happens?
- If one of us stops working in the business, do they keep their shares?
- If a buyer offers for the whole company, can a majority force a sale?
Insurance can fund a buy-out on death or disability. Speak to your financial adviser about it.
Where people get caught
Relying on a handshake
Memories differ when money is at stake.
Equal shares and no deadlock clause.
With two equal shareholders, one can block every decision.
No exit price formula.
Without a method, an exit can turn into a dispute about value.
Not linking the agreement to wills and powers of attorney.
Your shares pass under your will. Your agreement and your estate plan should work together.
Using a sole director company template for two owners.
Different rules apply to a company with one director who is also the only shareholder.
Common questions
Do we need a shareholders agreement if we already have a constitution?
A constitution sets out general rules. A shareholders agreement deals with the specific arrangements between the owners. Most companies with two or more unrelated owners benefit from both.
Can we make an agreement after the company has started trading?
Yes. It can be made at any time, as long as the shareholders agree.
Does a shareholders agreement apply to a partnership or trust?
Not directly. A partnership needs a partnership agreement. A unit trust needs a unitholders agreement. The issues are similar.
Starting a company with a partner? Put the agreement in writing now. Call (02) 8062 6300.
This article is general information only. It is not legal advice for your situation.