Common mistakes found in shareholder agreements

Key takeaways

  • A tailored shareholder agreement can save you tens of thousands of dollars or more down the track
  • Key clauses you should consider to protect yourself and your company
  • Free questionnaire to help you determine what you need in your tailored shareholder agreement

The depth and breadth of shareholder disputes we see would no doubt surprise most people.

In fact, shareholders disputes are still one of the most common issues commercial and litigation lawyers encounter on a daily basis.

Often this is because shareholders make the mistake of thinking their interests will be automatically protected, that their shareholding is too small to require an agreement or that they have such a good relationship with the company and other shareholders, they see it as an unnecessary expense.

The reality is tailored Shareholder Agreements are one of the most simple and cost effective ways shareholders can protect themselves and ensure the provisions they want included in their association with an organisation and each other are indeed included.

By not having a tailored shareholder agreement, you could be facing tens of thousands in legal, accounting and valuation expenses down the track to fight for what you have worked so hard for.

The cost of a shareholder agreement is a minute fraction of the costs of a dispute when you don't have one, not to mention the time, emotional and stress cost.

Common mistakes in shareholder agreements

Common issues we see include inadequate procedures in place to force a buyout of a rogue shareholder, a lack of share valuation mechanisms should a shareholder choose to exit and inadequate mechanisms in place for Director appointments and decision-making.

Key clauses you should always consider when preparing your shareholder agreement include:

  • Entry and exit of shareholders
  • Valuation of shares in the Company
  • Funding of the Company
  • Composition of the board of directors and board meeting procedures
  • Determining which key decisions for operation of the Company will be made by ordinary resolution, special resolution or unanimous resolution
  • Drag and tag along clauses
  • Death or TPD of a shareholder
  • Restraints of Trade

Why I should have a tailored shareholders agreement instead of an off the shelf agreement?

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).

As a rule, most constitutions are produced for 'shelf companies' with only standard provisions and the replaceable rules only contain very basic methods for dealing with the operation of a Company and may not accurately reflect the features shareholders would like to have in place.

Tailored Shareholder Agreements provide a simple mechanism for shareholders to drive changes in the operation of the Company without needing to enter into a number of variations of the constitution of the Company.

If these matters are not thoroughly discussed and an agreement reached by shareholders, the potential for costly and time consuming disputes is greatly increased.

What should we consider before we begin?

I strongly encourage shareholders to openly discuss key issues to reach consensus on how their company will operate now and into the future.

To assist with this conversation, we have developed a free questionnaire, which allows everyone to thoroughly consider the key questions around your Shareholder Agreement.

This allows us to prepare bespoke Shareholder Agreements quickly and efficiently for a Company for a fraction of the cost of having the documents prepared through long, involved and costly meetings with lawyers. Click here to receive a copy of our free Shareholder Agreement Questionnaire.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.