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How a shareholder’s agreement can help your business

March/April 2022
What is a shareholders agreement?

A shareholders agreement is a binding contract between the shareholders of a company, that specifies how a company is controlled, owned and managed, and outlines the relationship between shareholders, how shareholders’ rights may be protected, and how shareholders can exit the business.

What can a shareholders agreement do?

A well-drafted shareholders agreement will:

  • provide a framework for the ownership and management of the business, and clarify how the company is run, with a clear outline of the obligations of shareholders;
  • set out how potential disputes between shareholders can be settled. While disputes might seem unlikely, it’s better to agree on the resolution process when the relationship and communication between parties is in a good space, and before different parties (such as the beneficiaries of your estate) become involved;
  • show prospective investors/purchasers that your company is well-managed and provide transparency

regarding the company’s management, making it a more attractive proposition for investment.

Do I need a shareholders agreement?

Where a company does not have a shareholders agreement in place, decision-making power is determined by the relevant shareholdings.

Equal shareholdings inherently provide some protection, as each shareholder holds an equal amount of decision- making power. Without a shareholders agreement, there are no rules in place for a number of important issues, including how deadlocks are resolved, or what happens when a shareholder wishes to sell their share.

Where shareholdings are unequal, there are further matters for which a shareholders agreement provides important guidelines:

  • how do you protect minority shareholders interest against the wishes of a majority shareholder?
  • how does a majority shareholder stop a minority shareholder from greenmailing or stymieing activities that are in best interests of the business?

If your endgame is to sell the company, a shareholders agreement can set out this process to ensure a sale is executed cleanly to maximise the sale value. It can also map out how a shareholder can exit the company in a way that is beneficial for all shareholders.

Putting a shareholder’s agreement in place

The best time to have discussions about putting a shareholders agreement in place are when things are going well. As soon as there is a wedge between shareholders it can be too late, as you may end up having these conversations through legal representatives.

If something happens to you and your shareholding passes to your beneficiaries, it will be up to them to resolve these matters with the remaining shareholders. Often, this means having to do this without having a complete understanding of the company.

Partners Legal have an expert team of commercial lawyers who are able to work with businesses, accountants and advisors to ensure that your company, and your interest in it, is protected. If you’d like to explore how a shareholders agreement can help your business, please contact our office on (03) 8508 7800 or legal@pwg.com.au

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