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If you are knee-deep in founding a start-up, onboarding new investors, or looking to protect the company you have built, a shareholder’s agreement may be required. These agreements can be crucial to protecting operational integrity, and should be thoroughly drafted and reviewed by a legal advisor.
What is a shareholder’s agreement?
There are a couple of situations where a shareholder agreement may be a legally advantageous document to have on hand for operational decisions. This document sets out key parameters for business operations, including executive or director level behaviour, voting rights, and other financial concerns involved in a partnership of any sort.
There are two main situations where a shareholder agreement would be drawn up:
1. Company ownership b shareholders (partnership)
In this scenario, a number of shareholders who work within the company may wish to have management or decision (board) rights. This agreement will define how the company will run, and how key decisions will be made (e.g. company sale, or executive appointments).
2. Company investment (capital rasing, or passive investment)
In this scenario, an existing company may raise additional required capital by inviting investors willing to play a largely passive role in the company (i.e. provision of capital, minimal decision rights, etc.) An agreement will define how the company should continue to run, and any changes that may occur due to the new investor.
A shareholder agreement would also be used where two companies form a joint venture which will conduct operations through a third, jointly owned company.
strong>Do I need one?
A shareholder’s agreement can be a useful legal tool in many circumstances, and allows all interested parties to be fully aware of how many business and operational decisions will be made in a range of situations, ahead of the potential situation. CPA Australia explains that “while the Corporations Act does not require companies to have a Shareholders Agreement, having one can be beneficial for setting ground rules about issues that affect shareholders, such as one shareholder deciding to sell their share later, where the conditions for doing so, have already been worked out in a signed Shareholder Agreement.” (CPA Australia)
If you’re unsure whether or not a shareholder’s agreement would be of benefit to your company, a financial and legal advisor can provide valuable insight into making this decision.
What is covered in an agreement?
The topics and decisions covered in a shareholder’s agreement can vary, as this document can be tailored to the purpose and needs of the individual business; in addition to this, there may be industry-specific situations requiring attention.
However, there are a number of key items that would traditionally be covered in a shareholder agreement. Some of these are:
- Appointment or termination of executive-level employees
- Decisions requiring a unanimous vote
- Delegations and their use
- Shareholder meeting frequency
- Director’s key performance indicators
- Dispute resolution
- Sale or liquidation of the company
High-level, high stakes decisions around items such as those listed above can play a crucial role in the success or failure of a new company; this is why a detailed and methodical shareholder’s agreement can be invaluable in times of operational stress.
How can YML help?
Talk to our legal department today to see how YML Group can assist you with your shareholder’s agreement. Contact us on (02) 8383 4400 or by visiting the Contact Us Page