Do we need a Shareholders Agreement?

This is a question we are often asked by shareholders of newly established and existing proprietary limited companies.  The simple answer is, a properly drafted Shareholders Agreement can help shareholders avoid potential disputes over the way in which a company is operated, by proving an agreement between the shareholders on predominately commercial issues not covered by a company’s Constitution.

Upon incorporation a company is regulated by the Corporations Act 2001 (Cth) (Corporations Act), its regulations and to the extent a company has one, its Constitution.  However, the Corporations Act and the Constitution primarily focus on the legal, regulatory and corporate activities of the company and do not do deal with business objectives including the commercial expectations of the shareholders.



In this regard, shareholders should ask themselves:

• What are the business activities and purposes of our company?
• How long will the company operate and build up the business before selling the business and providing a return on each shareholders’ investment?
• Which shareholders are entitled to be appointed directors and thereby have a say in the day to day management of the business?
• What decisions may only be made by shareholders as a group, rather than the directors?
• How do shareholders with minority shareholdings have an impact in the decision making process, rather than having their wishes ignored by majority shareholders?
• Should shareholders as a group restrict the sale or transfer of shares outside the current group of shareholders?
• How are the funding requirements of the business to be met? Debt, equity or both?
• What happens when a shareholder who is active in the business dies or suffers a permanent disability?  How can the other shareholders acquire the shares of the affected shareholder?
• Should shareholders be restrained from being involved in other businesses which complete the business of the company?

In answering these and other related questions, the shareholders should be able to formulate the commercial issues to be agreed to in their Shareholders Agreement.

Although Shareholders Agreements are not vital to the success of a company’s business, especially where there is a small number of like-minded shareholders, they are generally recognised as greatly assisting the objectives of the shareholders as owners and operators of the business.

The content of the Shareholders Agreement will follow a generally accepted structure developed over the last 30 or so years of commercial legal practice, with additional specific clauses to deal with the company’s own circumstances.

It should be noted that despite what shareholders may agree, the Corporations Act will in most cases take precedence over the terms of a Shareholders Agreement.

The Constitution, on the other hand, may be overridden by a Shareholders Agreement to the extent of any inconsistency. However, ideally the Constitution should be amended to incorporate the terms of the Shareholder Agreement.

Nevett Ford Melbourne’s Commercial lawyers have a wealth of experience in the preparation of Shareholder Agreements and advising companies and shareholders alike.

Please contact Andrew Bini if you would like further information.

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Buy/Sell Agreements

It is commonly recognised that small proprietary limited companies and unit trusts are the most popular vehicles for parties to come together to establish and operate a business or to participate in an investment.  The most well managed of those vehicles are regulated by shareholder agreements (for companies) and unit holder’s agreements (for unit trusts).

In recent years a trend has developed where many of those agreements now contain provisions which require death and total permanent disability insurance for each shareholder/unitholder (participant).  The intention being that in the event of death or total permanent disability of a participant, the proceeds of those policies are to be used by the surviving participants to purchase the shares/units of the deceased participant.

The main effect of these provisions is twofold:

1.   to provide funds for the surviving participants to acquire interest of the deceased participant; and

2.   to provide funds to the family of the deceased participant in a situation where there may not be a ready market for the estate of the deceased participant to sell the shares/units. 

There are various ways to structure the required insurance cover and each has different taxation implications. There are also various ways to structure buy/sell clauses.  In this regard, one of several important matters to be taken into account is the need to ensure that the terms of the buy/sell clauses adequately provide for an annual review of the level of insurance cover against the value of the shares/units held by respective participants to ensure the proceeds of the policies is sufficient to acquire the interests .

We can assist with the preparation of shareholder and unitholder agreements containing buy/sell provisions.

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