Shareholders Agreements - There are good reasons for having one

However, they do not have a Shareholders Agreement. 

In the absence of a Shareholders Agreement, how do the shareholders resolve a dispute?  How does one shareholder exit from the company and on what terms?  How are deadlocks resolved between shareholders? 

Without a Shareholders Agreement in place, resolving these issues is very difficult and can be very costly.

A Shareholders Agreement is, in simple terms, a contract between the shareholders of a company.  

Unlike a company constitution, a Shareholders Agreement is not mandatory.  The Corporations Act 2001 (Cth) does not require companies to have one.

A Shareholders Agreement is different to a company’s constitution (which is mandatory, unless a company adopts to use the replaceable rules in the Corporations Act).

A company constitution includes general rules for the governance of a company as a whole.  It is generally limited to dealing with the powers and duties of company directors, how shares are issued and the processes for holding meetings and passing resolutions (of directors and shareholders).

Whilst there is some overlap between a company constitution and a Shareholders Agreement, a Shareholders Agreement is usually drafted with the specific needs of the company and its shareholders in mind.  A company constitution on the other hand only has generic terms that apply to all companies. 

Why is a Shareholders Agreement important?

A well drafted Shareholders Agreement will set out how decisions are made, what happens when a shareholder wants to leave the company and how disputes are handled, just to name a few topics.

A Shareholders Agreement can be implemented at any time during a company’s existence.  However, it is much easier for the terms of a Shareholders Agreement to be agreed upon when a company is first incorporated.   

That is when the level of goodwill between shareholders is generally at its highest and there has not yet been any dispute or disagreement about the management of the company and its business.

If you are considering starting a company, please contact us – we can prepare a Shareholders Agreement that is tailored to meet the specific needs of your business.

 The sooner you can implement a Shareholders Agreement, the better.   

 If you are unfortunate enough to find yourself in a shareholders dispute – with or without a Shareholders Agreement – we can also help you. 

It is a scenario often seen when people decide to go into business with one another; they incorporate a company and they become shareholders.  They have a great business idea.  They have a catchy business name.  They may have even designed an eye-catching website.  Their business is, hopefully, a profitable one.   All seems to be going well. 

Why have a Shareholders Agremeent | A Lawyer's Perspective

Potential pitfalls when settling disputes without a written deed

Mr Koon Wong (the Applicant) commenced proceedings against the bankrupt estate of his estranged daughter, Ms Mei Wong, relating to a property that he and Ms Wong owned as tenants in common in NSW.   Ms Wong’s trustee in bankruptcy (the Trustee) defended the proceedings.

On 29 July 2021, the Applicant’s solicitor sent a letter to the Trustee proposing to settle on the following terms (the Offer):

the property be sold as soon as possible under the instruction of the Applicant;

the Trustee be paid from the net proceeds of sale a sum estimated to be approximately $220,000; and

the balance of the net proceeds of sale be paid to the Applicant.

On 2 August 2021 the solicitor for the Trustee responded, accepting the Offer and paraphrasing the terms of the Offer as follows:

the property is to be sold as soon as possible under the Applicant’s instructions;

the amount of $220,000 will be paid to the Bankrupt Estate from the net proceeds of sale; and

the balance of the net proceeds of sale will be retained by the Applicant.

The Trustee’s solicitor also stated that a draft deed of settlement would “be sent to you for review shortly” (the Draft Settlement Deed), even though the Offer had been silent about a deed.

 On 3 August 2021, the Trustee’s solicitor sent the Draft Settlement Deed to the Applicant’s solicitor, which not only included the terms referred to above, but also added additional terms, such as that the property would be transferred in its entirety to the Applicant, a requirement that the Applicant indemnify the Trustee against any taxes payable on the transfer, and full releases.   Of particular significance was the fact that the Trustee’s acceptance of the Offer was not made conditional upon the parties executing a deed.   Further, when the Draft Settlement Deed was provided, the Trustee’s solicitor had expressly invited the Applicant’s solicitor to advise of any changes that he was instructed to request. 

The Applicant rejected the Draft Settlement Deed and by email dated 11 August 2021 the Applicant’s solicitor asserted that the Draft Settlement Deed constituted a counter offer which the Applicant did not accept.  The Applicant’s solicitor went one step further and stated that the Applicant’ Offer was no longer open for acceptance.  Unsurprisingly, the Trustee did not accept that the Offer was capable of being withdrawn and maintained that a binding agreement had been concluded, when the Trustee’s solicitor had accepted the Offer on 2 August 2021.

At paragraphs 27 – 39 of the judgment, the Court restated the principles governing whether parties have entered into a binding and enforceable agreement, including by noting that:

the law is not concerned with parties’ subjective intentions, or what they may have subjectively thought had been agreed;

the law is only concerned with ascertaining the objective intention of the parties, which is determined by reference to what a reasonable person would have understood from the other party’s words and conduct;

in determining whether a contract has been formed, it is not necessary to identify a precise offer or acceptance, nor a precise time at which an offer or acceptance can be identified;

rather, the question is to be answered by asking what a reasonable person in the position of the parties would think as to whether there was a concluded bargain; and

whether a communication accepts the terms of an offer without modification, or instead varies its terms, is a question of construction.

The Court found that a binding agreement was formed when the Trustee accepted the Offer on 2 August 2021, even though in its response the Trustee had made reference to a draft deed of settlement that would be provided separately.

The Court determined that an agreement had been formed for the following reasons:

The first and third terms of the Offer were accepted by the Trustee without qualification. The acceptance of the second term included a difference that was not material (i.e. a fixed sum of $220,000, rather than an “approximate” sum of $220,000) and did not change the substance of the agreement. The Court considered the reasonable person would not view the difference as introducing a new term which would result in a counter offer.

The Offer was expressed as operating as a Calderbank letter, meaning that the Applicant intended to rely on the Offer on the question of costs, if it was not accepted.  This ran counter to a submission made by the Applicant at the hearing that the Offer was conditional upon him obtaining consent from third parties.

The Trustee’s acceptance of the Offer was not made conditional upon the parties entering into the Draft Settlement Deed in the terms propounded by the Trustee.   The Draft Settlement Deed did not materially vary the terms of the agreement and simply addressed matters that sought to give effect to, or were otherwise incidental to, the agreed terms.

The Court found that as the Applicant had rejected the Draft Settlement Deed, when it was presented on 3 August 2021, the parties were left with a binding agreement that was recorded by the exchange of emails dated 29 July and 2 August 2021.

The case demonstrates the importance of stating an offer in definitive terms and that if a party wishes to make acceptance of a settlement offer conditional upon the execution of a formal deed or agreement, this should be made clear from the beginning.

Otherwise, parties may find themselves immediately bound by an agreement without having agreed to additional terms in formal documentation.

In the recent case of Wong v Wong [2022] FCA 78, the Federal Court of Australia has recently re-visited a question that occasionally arises when settling disputes, namely, whether a binding contract can be formed upon the acceptance of an offer where the offeree then proposes additional terms in a draft deed of settlement.

Family Business Succession Planning - Handing Over the Reins to the Next Generation

Often there is concern about a loss of control, or whether the timing is right, or a desire for change in the future direction of the business.

 If there is a transfer of ownership as well as a transfer of control, then this also raises questions about of how and when a payment to the retiring generation should be made, and how that payment should be funded.

 Overlaid on this background are the unique family dynamics between a parent and their adult child, or amongst siblings.  It is little wonder that the prospect of actively discussing the succession plan may fill some people with dread!

 For many years, we have acted for family businesses in developing a succession plan, and then implementing the plan.  The family businesses we have worked with are diverse, from winemakers to motor mechanics.  We have also handled succession planning for different business structures including companies, discretionary trusts, unit trusts, and partnerships.  We work closely with our clients’ accountants to ensure that optimal results are achieved.

 To be able to do this sort of work, the advisors need to be sympathetic, pro-active and understanding to the concerns of both generations.  We adopt that approach not just because it is intrinsic to what we do, but because we have lived the experience (as a second-generation family business ourselves).

Handing over the family business to the next generation can be challenging.

Director Identification Numbers | Make sure you rise above the DIN and get registered

From 1 November 2021, directors of Australian companies are required to apply for and verify their identity under the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 (Cth), which introduces reforms to Part 9.1A of the Corporations Act 2001 (Cth).

Applications are now open for a Director Identification Number (DIN). Below we outline what directors need to know about DINs and the application process.   

Why have Director Identification Numbers?

The DIN regime is a first of its kind in Australia and has been established in an effort to suppress both illegal phoenix activities and fraud through the tracing of company directors over time. The Australian Business Registry Services (ABRS) is responsible for the implementation and processing of DINs, whilst ASIC will enforce related breaches. Through this single source of business data, ABRS will be able to: 

•	prevent use of fraudulent identities;

•	monitor directors’ association with companies over time; and

•	ascertain directors’ involvement in phoenixing or unlawful activities.

What is a Director Identification Number?

A DIN is a permanent and individual 15-digit identifier provided to a director or someone who intends to become a director of a registered Australian company and who has verified their identity with the ABRS. Directors are required to apply for their own DIN, which directors will keep indefinitely. 

Who is required to hold a Director Identification Number?

If a person is a director or alternate director of a: 

•	registered Australian body that is a body corporate; or

•	registered foreign company that is a body corporate, 

under the Corporations Act, they are required to apply for a DIN. The requirement does not apply for shadow or de facto directors and the regime is relevant to both foreign and domestic directors of registered Australian companies. 

Both existing and new directors are required to apply for a DIN in accordance with the dates outlined below.

Date of directorship on or before 31 October 2021	- apply by 20 November 2022

Date of directorship between 1 November 2021 and 4 April 2022 - apply within 28 days of appointment

Date of directorship from 5 April 2022 - apply before appointment

1.	Persons who were directors on or prior to 31 October 2021, have 12 months to register;

2.	However, directors appointed between 1 November 2021 and 4 April 2022 (i.e. newly appointed directors) will have only 28 days from the date of their appointment to register; and

3.	Newly appointed directors from 5 April 2022 will be required to register before the date of their appointment.

The simplest way to apply for a DIN is online via the ABRS website www.abrs.gov.au/director-identification-number/apply-director-identification-number The online process requires that directors have a myGovID account (not to be confused with myGov). 

The myGovID app enables directors to prove their identity and the myGovID can be set up here www.mygovid.gov.au/

To apply for a DIN, the following documents are required for verification of identity:

•	Residential address held by the Australian Taxation Office; and

•	Information from two documents to verify their identity, for example an Australian passport, birth certificate, or driver’s licence.

The application process and timeframes for foreign resident directors remains the same as Australian resident directors. However, to complete an online application, the foreign director is required to lodge a paper application to verify their identity and provide a:

•	Certified copy of one primary document, for example a birth certificate or foreign passport; and

•	Certified copy of one secondary documents, for example a driver’s licence.

These documents can be certified by a notary public or staff at an Australian embassy, high commission, or consulate in the presence of the foreign director.

Once the identity has been verified in myGovID, the application process can be completed online through ABRS www.abrs.gov.au/director-identification-number/apply-director-identification-number

Once a DIN has been received, directors need to provide their DIN to the person responsible for holding company records for each ASIC registered entity in which the director is appointed. Directors must also inform any other companies to whom they are appointed in the future.  Presently, there is no requirement to provide DINs directly to ASIC, however, this will likely change, possibly by September 2023.

Causing an offence or failing to meet obligations under the DIN regime, may give rise to an infringement notice which may lead to civil penalties and/or criminal charges (1 year imprisonment). These offences include intentionally applying for multiple DINs and intentionally using false information in an application for a DIN.

All Australian companies are required to ensure that directors (and alternate directors) are aware of their requirements and obligations under the regime.

Although the deadline for current directors is 20 November 2022, we recommend that directors begin collating the required personal information and commence the application process now, while this announcement is fresh in their minds.

ABRS Website: www.abrs.gov.au/director-identification-number/apply-director-identification-number

Article written with the assistance of Molly Richardson, GDLP Student

Australia’s Director Identification Number Regime - What do directors need to do to meet their obligations?

Australia’s Director Identification Number Regime | What do I need to do to meet obligations?

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Shareholders Agreements - There are good reasons for having one

Potential pitfalls when settling disputes without a written deed

Family Business Succession Planning - Handing Over the Reins to the Next Generation

Director Identification Numbers | Make sure you rise above the DIN and get registered