If you’re going into a business with others, we strongly encourage you to put a decent Shareholders Agreement in place. When you plan your venture, your thoughts are most likely aligned, and your communication is superb. We wish you it lasts forever, but we all know this is not always the case. And it’s best to sign it when you are all in agreement, and before committing your time and capital. In this blog post, we briefly explain why a well-drafted shareholders agreement is not just a piece of paper, but a part of a solid foundation for business success.
What is a shareholders agreement?
It is a legally binding contract between the shareholders of a company. It serves as a guidebook for how the company will be managed, addressing important matters such as ownership structure, decision-making processes, dispute resolution mechanisms, and the rights and responsibilities of each shareholder. Shareholders agreements provide a clear framework for how the business will be operated, reducing misunderstandings and conflicts among shareholders. This clarity is especially crucial when there are multiple shareholders with varying expectations and goals.
What elements should you include in a shareholders agreement?
These agreements may seem complicated, but they boil down to a few universal elements that you should consider. Let’s have a quick look at what and why you should include the below:
- Business plan – In first place you should write down main business goals and objectives, so that the Company does not ‘diversify’ or change its direction without consent of all shareholders;
- Dividend policies – Establish guidelines for the distribution of profits to shareholders, ensuring transparency and fairness in the allocation of dividends based on agreed-upon criteria and timelines;
- Protection of minority shareholders – In cases where one or more shareholders hold a minority stake, a well-drafted agreement can protect their interests by outlining special rights and protections;
- Confidentiality clauses – Ensure that sensitive business information remains within the company’s walls;
- Dispute resolution – Disputes are an unfortunate reality in business. A shareholders agreement can establish procedures for resolving conflicts, potentially preventing costly and time-consuming legal battles.
What else you should consider?
- Exit strategies – Shareholders agreements often include provisions for selling or transferring shares, offering a structured way for shareholders to exit the business while minimising disruption, while protecting business from unwanted investors that would disrupt the business (Restrictions on share transfers);
- Breakdown rules – If you can’t reach an agreement on any of the rules, you should implement rules that would provide a quick fix: either restructure of the Management, sale of the entire business, or buyout of one of shareholders. This clause can consider method of valuation and terms of repayment. It will allow the business to put its problems behind and ensure this loss of common ground will not lead all shareholders to lose their investment;
- Non-compete and non-solicitation agreements – Protect the company’s interests by preventing shareholders from engaging in activities that could compete with or poach customers, employees, or business opportunities from the company;
- Future investments – providing outline on how the Board should source its funding, e.g. new shares can only be issued if special resolution is passed, with exceptions where it would prevent insolvency;
- Compliance with Australian law and policies – Shareholders agreements must comply with Australian corporate law. By consulting with legal and financial professionals, you can ensure that your agreement adheres to all relevant regulations.
Involve taxation experts in drafting
Drafting a shareholder agreement requires legal expertise and involving a lawyer to prepare it. Nevertheless, don’t underestimate taxation expertise and engage with experienced tax advisor to ensure that the agreement covers all relevant matters. At BTMH, business & tax advisors offer their expertise in forming procedures, analysing consequences and effectiveness of each paragraph in reaching desired solutions in events considered. Book your appointment with our Chartered Tax Advisor.