Shareholders Agreement – Key Considerations: Turnbull Hill

Introduction

A shareholders agreement is crucial for governing internal company management and outlining the rights, responsibilities, and obligations of shareholders. Ensuring it is comprehensive and legally sound can prevent disputes and misunderstandings down the line. In this article, we will discuss key aspects of a shareholders agreement, including the necessity of having one, important clauses, and how to handle deadlock situations.

What is a shareholders agreement?

A shareholders agreement is a legally binding document between a company’s shareholders that governs the management of the company and the relationship between shareholders. It outlines the company’s structure, shareholder rights, decision-making processes, and dispute resolution mechanisms. The agreement works in conjunction with the Corporations Act 2001 and a company’s constitution.

A well-drafted shareholders agreement can avoid confusion, especially in areas like voting rights, dividend policies, and the transfer of shares. It also protects minority shareholders by ensuring their voices are heard.

What is a deadlock clause in a shareholder agreement?

A deadlock clause is a vital provision for resolving disputes when shareholders or directors cannot agree on important company matters. In a 50/50 ownership scenario, disagreements can stall business operations. The deadlock clause sets out mechanisms, such as mediation or arbitration, to resolve these disputes. Some deadlock clauses even permit one party to buy out the other if the situation becomes irreconcilable.

This clause helps to ensure that businesses remain functional even when key decision-makers cannot agree, mitigating operational risks.

Other important clauses in a shareholders agreement

Beyond the deadlock clause, several other provisions are critical:

• Transfer of shares: Procedures for share transfers in cases like retirement or death. For instance, in Australia, mechanisms should be in place for the transfer of shares upon the death of a shareholder to prevent ownership from falling into the wrong hands.
• Pre-emption rights: These protect existing shareholders by giving them the first opportunity to buy shares that are being sold, preventing unwanted third-party involvement.
• Confidentiality: Ensures sensitive company information stays private, which is vital in competitive markets.
• Non-compete clause: Prohibits shareholders from engaging in activities that directly compete with the company.

Do I need a shareholders agreement?

Yes, a shareholders agreement is essential, especially for private companies or startups. Without one, disputes can lead to lengthy and expensive legal battles. An agreement also provides a clear framework for the sale of shares and other events like death or retirement. Additionally, it helps maintain the balance of power and prevents minority shareholders from being overshadowed.

While the Corporations Act and a company constitution may offer some guidance, a shareholders agreement allows for tailored solutions specific to the company’s needs.

Does a shareholders agreement need to be registered?

In Australia, there is no legal requirement for a shareholders agreement to be registered. However, it is important that the agreement is drafted clearly and signed by all parties to ensure it is enforceable. Storing it with the company’s records is advisable to ensure transparency and accessibility.

Real-life case example

Consider a startup had two equal shareholders, and no deadlock clause was in place. When disagreements arose over the company’s direction, the lack of this clause resulted in expensive litigation and business disruption. Including such a provision in your shareholders agreement would have allowed for a quicker and less costly resolution.

Conclusion

A well-drafted shareholders agreement is an essential tool for any company, providing clarity on shareholder rights, dispute resolution, and the transfer of shares. Turnbull Hill Lawyers can guide you through the drafting process to ensure your shareholders agreement meets all legal requirements and protects your business interests.

Call us today

If you’re unsure whether your business needs a shareholders agreement or need advice on creating one, contact Turnbull Hill Lawyers. We specialise in shareholders agreements and can provide expert guidance tailored to your situation. Reach out to us today to ensure your business runs smoothly, no matter what challenges arise.