In the Shareholders Agreement, the shareholders determine how the company will operate and their relationships. It is a joint effort between the shareholders’ agreement and its constitution.
Shareholder Agreement: How to Write it?
It is necessary to have a Shareholder Agreement if you plan to start a company with a co-founder, investor, or silent partner. Shareholder agreements define in what way a company should run, how shareholders should be relating to one another, and how investors’ investments are protected.
Are shareholder agreements necessary?
The law does not require shareholders to enter into a shareholder agreement. However, a shareholder agreement will benefit nearly every company (except for businesses with only one shareholder).
Furthermore, one should consider that a Shareholder Agreement can be as simple or complex as the parties desire. The possibility that a very detailed Agreement may be too costly and time-consuming might still make you want to prepare something more fundamental, such as a Shareholder Agreement Template for Australia.
Without a Franchising Law agreement, what are the risks?
Investing in companies without a Franchising Law Agreement poses several risks.
You will probably have some kind of disagreement or misunderstanding during your involvement with the company. Some people think the company works one way but find out several years later that it doesn’t.
Perhaps you believe that you will receive additional company shares after working for the company, only to find out that this is not the case several years later.
There is a possibility that the company’s majority shareholder will pass away, leaving their only child with their shares.
You will lose all voting power, or even shareholding, that you used to have if the company issues new shares to all shareholders but you.
When you are the majority shareholder, you might want to sell your shares, but you might discover that there are minority shareholders who can vote against the sale, holding you to ransom in a way.
It is possible that another shareholder will not do the work you thought they would do for the company, and there might be no way to enforce their performance.
Finally, the shareholders might not be able to reach an agreement on a particular company matter, so they might not resolve the dispute without incurring an extremely high cost.
The amicable resolution of these potential issues through a written shareholder agreement in advance would allow you to avoid expensive (or insurmountable) problems down the road.
Changes to shareholder agreements possible?
Definitely, you can revoke or amend a Franchising Law agreement if circumstances change. However, the relevant shareholders will have to agree on it.
Should shareholders’ agreements contain specific clauses?
Since shareholder agreements are pretty flexible, you can customize them according to your company’s needs and requirements. However, your Agreement should include the following clauses:
- Goals and limitations of the company (concerning its activities)
- Share voting rights and classes
- Nomination and duties of directors
- Borrowers’ rights, loan accounts, and interest payments
- Distribution of dividends
- Decision-making, reporting, and board meetings
- Capital calls and issuing new shares
- Right of first refusal and sale or transfer of shares
- Changing control of a company and “dragging along” provisions
- In the event of incapacity, divorce, or death
- Business valuation and departing shareholders
- Non-compete agreements and confidentiality
- Default events
- Arbitration and dispute resolution
- Termination, and
Removing or adding shareholders
Is it possible to add a new investor to an existing shareholder agreement?
A Franchising Law Agreement often explains how a new investor can become a company’s shareholder.
In most cases, a new shareholder will have to agree to the terms of the existing shareholder agreement.
An agreement like this can be created by getting the new shareholder to sign the “Deed of Accession,” stating that they agree with the previously existing agreement.
In return for their investment, the new shareholder will receive shares. They may transfer shares from one party to another if they simply buy shares from a departing shareholder. Otherwise, the company needs to issue new shares so the new shareholder can become a shareholder. There could be a dilution of the interests of existing shareholders if this happens. The Shareholder Agreement should address this.
What if a shareholder wants to retire from the business?
You should address this in your shareholder agreement. The departing shareholder usually provides existing shareholders with a right of first refusal before selling the shares to anyone else.
When a shareholder dies, what happens?
Unless this is addressed in the Shareholder Agreement, nominated beneficiaries may receive the shares of a deceased shareholder. For example, you could give your spouse, children, or even a charity. Especially small companies with a large proportion of shares owned by the deceased can face this issue.
To avoid these problems, many Shareholder Agreements provide that the company will obtain an independent valuation of those shares and buy them from the deceased shareholder’s estate under the fair market value.
Shareholder Disputes & Franchising Issues
Shareholder agreements are legally binding
Yes. Shareholder agreements must comply with legal requirements (i.e., all relevant parties must sign them).
The Corporations Act of 2001 and ordinary principles of Australian contract law apply to any shareholder agreement. The Act is likely to prevail if the Shareholder Agreement violates it in any way. This means that the part of the Agreement that does not comply will be overridden.
If a shareholder agreement violation occurs, what happens?
In case of a breach, a shareholder agreement should specify what will happen. Depending on the nature of the shareholder agreement, unresolved violations may prevent shareholders from voting at shareholder meetings for some time.
The company can buy the defaulting shareholder’s shares and remove him if he does not rectify the breach on schedule.
What happens if the Shareholders disagree?
It is essential to clarify the process in the Shareholder Agreement. It’s up to shareholders to choose the process that works best for their situation. The majority of Shareholder Agreements establish a procedure requiring parties that disagree to first put their disagreement in writing, then arrange a meeting.
If a dispute does not resolve within a specified timeframe, it may require mediation or arbitration.
Can you force shareholders out?
While this is possible, Shareholder Agreements can protect against it.
A share issuance that diluted the interest of an existing shareholder may result in that shareholder no longer having voting power. It would then be possible for the other shareholders to pass a resolution to force that shareholder out.
How can a Shareholder Agreement be terminated?
There should be a series of termination clauses in your Shareholder Agreement. Usually, termination occurs in the following situations:
- The shareholders have agreed to it
- When a company ceases to operate and dissolves
- A single shareholder receives all the shares, and
- Initial public offerings (IPOs) by the company
The Shareholder Agreement may be terminated by agreement between the parties and according to the usual principles of contract law, even if it does not explicitly address how and when to terminate.
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