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What is a Shareholders Agreement? (2021 Update)

What is a Shareholders Agreement? (2021 Update)

Learn why a Shareholders Agreement is an essential document in any new company and how it can manage potential risks and disputes.

4th February 2021
Reading Time: 2 minutes

A Shareholders Agreement is a legal contract entered into and agreed upon by all shareholders of a company. The Agreement outlines the original intentions of the parties and lists the rights and responsibilities of each shareholder. It is also legally binding. Examples of these include: share transfer, management, buying and selling shares, exit strategies, warranties, trade rules, dividends, policies or procedures. This agreement should be made after incorporation, when all parties are fully committed. Shareholders Agreements fall under the rules of the Corporations Act 2001 (Cth), which governs the rules around issuing shares. It is different from a company constitution, which governs the company’s internal rules and other stakeholders. It also differs from a co-founder agreement, partnership agreement or articles of association.

Why do I need a Shareholders Agreement?

A Shareholders Agreement can manage potential risks and disputes that may arise in the future. Many new companies will believe this sort of agreement is not necessary. However, it may prove to be a cost-saving dispute resolution mechanism in the future. Disputes can arise at any time. By having an agreement in place dealing with the situation, it can reduce the amount and duration of disputes. An existing agreement forms an important legal foundation for your business or start-up. It helps to ensure all investors are on the same page from the onset of the business venture.

It is also important to note that the agreement is private and does not have to be made public. This means that the document does not need to comply with any set form or procedure. Although, it does have to be valid at law.

What should my Shareholders Agreement include?

The agreement is tailored to the needs of the business. It should contain clauses that fit the purpose of the agreement. Some of the information found in a Shareholders Agreement include:

  • Who the shareholders are;
  • Who makes up the board of directors, and what each director’s role is;
  • What the limits to each director’s control/authority are;
  • What is to happen in adverse situations (e.g. a director passes away, resigns or files for goes bankrupt);
  • Policies that concern profit;
  • What happens if a shareholder decides to leave or there is a falling out (e.g. rights when they leave; if the majority are able to force the minority to sell); and
  • What happens to departing shares, and how they are valued and paid for.

The clauses in the agreement can provide for certain decisions and actions to require a majority. Others may require unanimity for important decisions that can affect single or groups of shareholders. Clearly, these agreements are an important part of forming a company.

Complete a Shareholders Agreement for your business by simply filling out our easy to use online interview. You can also upgrade to have a specialist lawyer provide legal advice and add customised clauses to your document. This will ensure the agreement is drafted with maximum security and protection for the company and its shareholders. A business lawyer can provide help where needed.

Don’t know where to start?
Contact a Lawpath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

Author
Tom Willis