As a business travels through its existence, it will accumulate a number of key documents. Amongst these is often found a shareholders’ agreement. Much as the name suggests, a shareholders’ agreement serves to regulate the relationship between shareholders, and between the company and its shareholders. When considering company governance, it makes up one part of the core governing documents; the others being the company constitution and the Companies Act 1993.
For many businesses, having a shareholders’ agreement is as essential as having insurance. Much like failing to obtain proper insurance coverage, a lack of a shareholders’ agreement, or one that no longer appropriately reflects the business, can end up being incredibly costly.
What is a Shareholder Agreement?
A shareholder agreement defines the relationship between the shareholders, and in turn, the shareholders and the company. Typically, shareholder agreements are useful for small to medium sized enterprises (companies with fewer than 25 shareholders).
Some common features of shareholder’ agreements include:
- How directors of the company are appointed;
- How and when shares in the company can be transferred or sold;
- What happens where a shareholder is misbehaving;
- Veto rights;
- How a company may go about raising funds for itself; and
- A definition of the purpose of the business and how that purpose might be changed.
Does My Company Need a Shareholder Agreement?
Whether a company requires a shareholder agreement depends on the makeup of the shareholders of the company in question. Unless the company is owned by spouses, a shareholders agreement is likely to be a must; this includes where the shareholders are family and friends. Sadly, shareholder interests will not always align, and disputes may arise. A shareholder agreement will provide guidance and solutions where this occurs.
Without a shareholders’ agreement, the constitution and the Companies Act 1993 will govern the relationship between shareholders. This may not be acceptable for some companies, as these usually take a majority rules approach to decision making.
When Should I Review my Shareholders’ Agreement?
Where a company does have a shareholders’ agreement, the shareholders should subject it to regular review. In particular, a company needs to review, and potentially change its shareholder agreement where the:
- Nature of the shareholders change (i.e. have gone from owner-operators to investors);
- Shareholders agreement has not been subject to a review within the last 5 years;
- Purpose of the business changes; and
- The company seeks to do a capital raise.
We recommend a shareholder agreement is drawn up before you go into business, but it is never too late to get a shareholders’ agreement drafted and signed. Please contact the author to discuss whether a shareholders’ agreement is right for your business or to hold a review of one already in place.
Disclaimer: The information contained in this publication is of a general nature and is not intended as legal advice. It is important you seek legal advice particular to your circumstances.