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Shareholders Agreements - There are good reasons for having one


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. 

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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.

What is a Shareholders Agreement?

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.

How we can help?

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.