If you’re in business with others, having a shareholders’ agreement isn’t just a good idea—it’s essential. While it might seem like something only big companies need, businesses of all sizes can benefit from this legal safety net.
In this blog, we’ll explore why shareholder agreements are so important, when you should have one, and what key terms to include to avoid disputes.
Why Shareholders’ Agreements Matter
A shareholders’ agreement sets out the rules for how a business is run and defines the relationships between shareholders. Here’s why it’s a must-have:
- Prevents Disputes: It provides clarity on decision-making, responsibilities, and how conflicts will be resolved.
- Protects Interests: Whether you’re a majority or minority shareholder, an agreement can safeguard your rights.
- Provides a Roadmap: It outlines processes for key events, such as adding new shareholders, selling shares, or resolving deadlocks.
Without an agreement, you’re left relying on general company laws, which may not reflect the specific needs of your business.
When Should You Have a Shareholders’ Agreement?
The short answer? As soon as possible. Ideally, you should have a shareholders’ agreement in place before the business begins trading. However, it’s never too late to create one. Here are some situations where an agreement is crucial:
At Startup: When the business is being formed and shares are being issued.
New Shareholders: When bringing new investors or partners into the business.
Restructuring: When the business structure changes, such as merging or acquiring another company.
Growing Disagreements: If tensions are arising, an agreement can establish clear rules to avoid further conflict.
What to Include in a Shareholders’ Agreement to Avoid Disputes
A well-drafted agreement doesn’t just outline the basics—it anticipates potential issues and provides solutions. Here’s what to include:
1. Roles and Responsibilities Clearly define what each shareholder is responsible for. Who oversees daily operations? Who makes strategic decisions? Having these roles outlined prevents misunderstandings.
2. Ownership and Share Transfers Set out rules for:
Issuing New Shares: How will this impact existing shareholders?
Selling Shares: Should other shareholders have the first right to buy?
Restrictions on Transfers: Protect the business from unwanted external influence.
3. Profit Distribution Include a dividend policy to ensure clarity on how and when profits will be shared.
4. Decision-Making Process Not all decisions need to involve every shareholder. Define what requires:
A unanimous vote (e.g., selling major assets).
A majority vote (e.g., approving budgets).
5. Dispute Resolution Disputes can arise even in the best partnerships. Include mechanisms such as mediation or arbitration and deadlock provisions to resolve conflicts efficiently.
6. Exit Strategies Plan for the unexpected by addressing:
How shareholders can exit the business.
What happens if a shareholder breaches the agreement or passes away.
How shares will be valued during an exit.
7. Confidentiality and Non-Compete Protect your business by requiring shareholders to keep sensitive information confidential and restricting them from starting or joining competing businesses.
8. Future Funding Obligations If shareholders may need to contribute additional capital, set out the terms for when and how this will happen.
The Risk of Not Having an Agreement
Without a shareholders’ agreement, disputes can escalate quickly, leading to:
Costly legal battles.
Stalled decision-making that harms the business.
Loss of valuable relationships.
In the absence of an agreement, you’ll have to rely on default laws, which may not suit your business’s unique needs.
Take Action Today
A shareholders’ agreement is more than just a legal document—it’s an investment in your business’s future. By addressing potential issues upfront, you can protect your business, your relationships, and your peace of mind.
If your business doesn’t have a shareholders’ agreement, or if your current agreement needs a review, don’t wait. Speak to a solicitor who can tailor an agreement to suit your business.
Protect your business now so you can focus on what really matters—growing and succeeding.
Why Every Business Owner in Australia Needs a Shareholders’ Agreement
