What is a Shareholders Agreement?

A shareholders agreement

While by no means compulsory – clarifies the expectations of members that is lacking in company constitutions. It provides a transparent framework for everything from share transfers; to entry and exit from the company; to confidentiality; and to dispute resolution. Having a well-drafted shareholder agreement is a shareholder safety measure and can engender confidence in the company and its enterprise because:-

  • Every person involved in the business understands where they stand, what they are entitled to, and how they should interact with the organisation and other shareholders;
  • Disputes can be resolved quickly and be prevented from happening in the first place;
  • The clarity of purpose that the agreement provides allows the company to move toward its strategic objectives with fewer distractions.

We’ve put together some basics for an effective shareholder agreement so you know what elements should be included, but it’s important to have the agreement drafted and/or reviewed by a specialist business lawyer to ensure it accounts for all of the potential scenarios that may be encountered.

A member of a company is often called a shareholder. Members of a company have certain rights and responsibilities. – asic.gov.au

Common inclusions in a shareholder agreement

Drag-along Clause

If someone offers to buy the company and 4/5 shareholders want to accept the offer, what happens? Many shareholder agreements include what is called a ‘drag-along clause’, which can allow for a majority to compel a minority to sell their shares to a purchaser.

Dispute resolution procedures

There are very few businesses that never experience any sort of dispute among shareholders. Protect the company by ensuring there is a clear, fair process when issues are raised.

Restraint of Trade Provisions

These clauses limit the activities of shareholders to prevent them from acting in a way that damage the interests of the company.

Terminating Events

What happens if a shareholder passes away, or sells their shares? Having clear guidelines for situations like this ensure the company doesn’t miss a beat.

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Last updated: 27 November 2019