When a Company is incorporated, the relationship between the Company and its shareholders and directors will primarily be governed by its constitution and the provisions of the Corporations Act 2001 (Cth). If a company does not have a constitution it will be governed by the replaceable rules in the Corporations Act 2001 (Cth).
However, the Company constitutions that are produced for “shelf companies” and the replaceable rules, only contain very basic methods for dealing with the operation of a Company and may not accurately reflect the features that the shareholders would like to have in place for the operation of their company.
By way of example, the exit of shareholders is usually only governed by a right of pre-emption but does not give continuing shareholders any ability to force a buy-out of that shareholder or to control who other shareholders may be. Usually a company constitution will not contain an adequate procedure for most companies regarding exit and entry of shareholders.
Shareholders may also wish to vary mechanisms for how directors are appointed and what voting power they carry. Often all shareholders will want to be represented on the board in circumstances where they would not have the ability to do so under the provisions of a standard constitution.
Other issues that shareholders often wish to cover include funding, large capital acquisitions, death or incapacity of a director or shareholder, restraints of trade and a myriad of other issues.
When shareholders wish to address these sorts of issues, the primary way in which this is usually achieved is through the use of shareholders agreements. Under shareholders agreements, all shareholders agree on particular matters and agree that the provisions of that agreement will take precedence over the provisions of the constitution for as long as the shareholders agreement is in force.
This allows shareholders a simple mechanism to effect changes in the operation of the Company without needing to enter into a number of variations of the constitution of the Company. As a general rule, shareholder agreements are one of the most simple and cost effective manners for shareholders to achieve their desired results.
Hillhouse Burrough McKeown has extensive experience with shareholder agreements and the various types of clauses that shareholders may seek to incorporate. Please contact us if you would like additional assistance with shareholder agreements.