Despite your best intentions, business relationships can deteriorate for any number of reasons.

So while it’s not a legal requirement to have a formal shareholders’ agreement, every company with more than one shareholder would be well advised to have one.

Read on to find out what a shareholder agreement is and why they are so important.

 What’s a shareholders’ agreement?

 A shareholders’ agreement is a legal agreement made between all or some of the shareholders of a company. Much like a marriage prenup, it’s traditionally signed on or before the incorporation of a company and helps set out expectations at the start of a business relationship. However, it’s never too late to write one if your business doesn’t have an agreement in place.

While each shareholders’ agreement will be different, typically the document will:

  • Provide a framework for how the business will be run
  • Govern how specific business decisions are to be made on a day-to-day basis
  • Set out the rights and obligations of each shareholder
  • Describe how problems between shareholders will be handled
  • Regulate the sale of shares in the company

Why do you need one?

 No one can predict the future. But, as the saying goes, an ounce of prevention is worth a pound of cure. So here are four reasons why a shareholders’ agreement can help you avoid a messy business ‘divorce’.

  1. Reduces the risk of disputes

 The very act of drafting a shareholders’ agreement requires shareholders to consider and anticipate any issues that could become a concern in the future. Having these discussions from the get-go can help you avoid costly and rancorous disputes down the road.

  1. Offers protects for minority shareholders

As a general rule, majority shareholders have the upper hand when business decisions go to the vote. However, a shareholders’ agreement can protect minority shareholders’ interests by setting out the percentage of the vote required for certain business decisions. For example, the agreement might stipulate that if the company wanted to issue more shares, this could only be done with the unanimous consent of all shareholders.

  1. Protects majority shareholders’ interests

Imagine a scenario where the majority of shareholders wanted to sell the business, but couldn’t because a minority shareholder refused? In this instance, a provision referred to as a ‘drag along’ clause can force a sale without the majority shareholders being held to ransom by the unwilling parties.

 

  1. Controls the transfer of shares

 When you are a shareholder in a small business, you might not want an unknown third party or external investor to also own shares in the business. So a shareholders’ agreement can be useful in setting out what happens to shares should one shareholder wish to sell or dispose of them for whatsoever reason. For example, there could be a right of first refusal over the shares in question or a rule saying you can’t transfer your shares without the other shareholders’ consent.

Blaine Hattie is a commercial lawyer at Sutton Laurence King Lawyers.

 Would you like to draft a shareholders’ agreement? Sutton Laurence King can help. Contact us on 03 9070 9810 or email info@slklawyers.com.au