Queensland Business Law Today

A Shareholder’s Agreement is something that I strongly encourage all my clients who operate a business (either as a partnership or company) to have.  When I first see a client about starting a new business, they are often full of enthusiasm and great intentions however, have not given much thought about what could go wrong.

The breakdown of a business relationship is a very stressful time for owners and by simply having a Shareholder’s Agreement in place, you could save a lot of money on legal costs and stress and avoid Court.

What does the Shareholder’s Agreement cover?

The primary aim of the Shareholder’s Agreement is to resolve any potential issues that will arise in the operation of the business. It will also typically include:

1. What happens on the death or total permanent disablement of an owner;
2. Conflict of interest;
3. Retirement;
4. Contribution of capital;
5. Composition of the board;
6. Decision making process and resolutions that require a majority or unanimous consent;
7. The roles of the directors;
8. The contribution of capital into the business as and when needed;
9. Ownership of intellectual property;
10. Profit distribution policies;
11. Restraints of trade; and
12. Dispute resolution.

The Shareholder’s Agreement, as opposed to your company’s constitution, is more specialised and tailored to your company’s particular purpose, the nature of its business and the aims and wishes of its shareholder’s.

Advantages of a Shareholder’s Agreement

The main aim of the shareholder’s agreement is to bring certainty to the business relationship. In particular, a Shareholder’s Agreement will:

1. Make the partners think about and address the issues at the right time (earlier rather than later);
2. Create confidence between the partners as to the strategic direction of the business; and
3. Help avoid expensive disagreements.

Preparing the Shareholder’s Agreement

Prior to preparing the Shareholder’s Agreement, you should speak with all shareholder’s and get an understanding of what you want to achieve.  Then, seek the advice of an experienced solicitor who will be able to explain to you the legal implications and then draft the Shareholder’s Agreement for you.

As you can see, there are many issues to consider and an experienced solicitor can help ensure the Shareholder’s Agreement is tailored to suit you. It is easy to see why a Shareholder’s Agreement is an important tool in business planning.

If you have any questions relating to Shareholder’s Agreements, please do not hesitate to contact me.

I am often asked to review shareholders agreements between existing shareholders and shareholders wishing to purchase a business.  A question often asked is what voting rights they have.

The shareholder entering the business may reach a hand shake agreement with the other shareholders to have a say in the general running and strategic direction of the business, without the responsibilities of being a director.

When the time comes to sign the shareholders agreement, the powers the shareholder thought they were to receive are nowhere to be found in the shareholders agreement.

Accordingly, if you are considering becoming a shareholder in an existing or new company and wish to protect your rights, it is important that you ask yourself the following questions:

• What types of issues can the following parties vote on:

(a) The Chairman;
(b) The board of Directors;
(c) The Shareholders.

• Who are the parties that make up the board of Directors, and how are the Directors appointed?
• Which of the parties mentioned in item 1 will get a casting or deciding vote if there is a deadlock between the  parties?
• Whether you will have the same personal liability as other shareholders if the business is called upon to fulfill any future financial obligations.

A shareholders agreement tailored to your specific circumstances can assist the parties with:

1. Knowing their full rights and obligations about voting rights before entering into a transaction;
2. Knowing which issues they can vote on and what will happen if there is a deadlock or dispute between the parties;
3. Knowing the types of resolutions for different decisions (ie unanimous special resolutions or ordinary resolutions);
4. Ensuring that any disputes or deadlocks are resolved quickly and with minimal interruption to the day to day running of the business.

If you require advice or assistance when entering into a shareholders agreement, or with reviewing an existing or new shareholders agreement, please do not hesitate to contact me.

I was recently asked to give advice to the client in relation to a partnership agreement that they had signed in their business.  The agreement had been purchased online and my client had basically “filled in the blanks”.

My client is now a 50% owner in the business but because of the terms of the agreement that was signed, my client has no say at all in the management and operation of the business.  This news was distressing for my client, especially given the business relationship is deteriorating.

This type of situation could easily have been avoided by the parties seeking advice and properly documenting an agreement that actually reflected the arrangement between the parties.  A properly drafted agreement can serve to avoid unnecessary disputes arising throughout the term of a business relationship.

A shareholder or partnership agreement should address a number of issues, including:

• The correct legal entity of each owner;

• The principal of each owner, if the owner is a company or a trust;

• The percentage of the business owned by each owner;

• Whether any other agreements are contingent on the shareholder/partnership agreement (such as buy/sell agreements, employment agreements, loan agreements);

• The capital to be injected by each owner into the business;

• What happens if further capital is required;

• The ownership of key assets in the business such as intellectual property etc;

• Any prerequisites for being an owner of the business (such as a professional qualification);

• If the business is a company, the minimum and maximum number of directors;

• Representation on the board;

• The percentage of ownership required for certain resolutions to be passed;

• The role that each principal plays in the business;

• Any restraint on the owner upon leaving the business;

• Profit distribution policy;

• How a party can exit the ownership of the business (i.e. do they have to first offer their share in the business to the other owners);

• What happens upon the death, total and permanent disability or trauma of a principal;

• Can an owner be expelled from the business;

• How is the business valued upon the exit of an owner;

• What happens if a dispute arises.

I also have found from experience that addressing these issues at the commencement a business relationship allows the parties to address some difficult topics before they commence the business relationship.  I have had occasions where clients have decided not to go into business with another person as a result of negotiations for the shareholder agreement.

If you have any questions in relation to this important document please do not hesitate to contact me.