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.

Ryan was admitted to practice in September 2020. After his admission and prior to joining our firm, Ryan worked in a Community Legal Centre where he gained invaluable experience assisting on both civil and criminal matters, including regularly appearing in both regional and metropolitan Courts.

Since joining our firm in August 2021, Ryan has assisted clients across a wide range of practice areas, including commercial and property advice and transactions, litigation and even compulsory acquisition matters.

During this time, he has become an invaluable member of our firm, assuming greater responsibility for client matters. 

Ryan is considered by clients and colleagues as a dependable and approachable lawyer who provides efficient and reliable advice and assistance.

Ryan graduated from Flinders University with a Bachelor of Laws and Legal Practice and a Bachelor of Business (Management) in early 2020. Ryan then completed his GDLP through the College of Law, whilst working full-time as a Law Graduate in a large South Australian commercial law firm.

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Ryan graduated from Flinders University with a Bachelor of Laws and Legal Practice and a Bachelor of Business (Management) in early 2020. Ryan then completed his GDLP through the College of Law, whilst working full-time as a Law Graduate in a large South Australian commercial law firm.

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