Shareholders Agreements | Unitholders Agreements | Buy-Sell Agreements
Owners of a company or unit trust, who have business partners in the company or unit trust, need to consider if they need an agreement with their business partners as to how the business will be run.
Do I need a shareholders’ agreement?
We recommend that every private company that has multiple shareholders (who are not spouses) consider a shareholders’ agreement (SHA).
A SHA is a written agreement between the owners of a company (being the shareholders) about how the company will be managed. The SHA allows you to set out in advance the ‘deal’ for the company or venture and is legally binding on the shareholders.
The SHA ensures that you and your business partners in your company are on the same page and gives you certainty about what the process will be if there is a dispute, or if some crisis arises.
The most financially destructive event for a private company is a prolonged shareholder dispute. The business suffers whilst the owners are fighting and distracted. Customers and key employees sense the tension and leave. If the company is eventually put into liquidation because the shareholders simply could not agree, then the goodwill of the company can be completely extinguished – destroying shareholder value and all the hard work of the company owners over many years.
If you are the sole owner / shareholder of your company, or you and your spouse together own all the shares, then you do not need a shareholders’ agreement.
What types of matters are governed in a shareholders’ agreement?
Your SHA would generally deal with:
who is entitled to be a director?
who will be the chair of the directors?
does the chair have a casting vote?
is decision making done on the basis of shareholding percentages, or is it 1 director = 1 vote?
pre-emptive rights - do shareholders have to offer their shares to the other shareholders first when they wish to sell their shares in the company?
are shareholders entitled to transfer their shares to a related entity such as a family trust or SMSF?
are the shareholders required to provide $$$ to the company if the company requires further finance?
are the shareholders required to provide personal guarantees for the company’s debt?
non-compete clauses to prevent (or allow) shareholders from having competing businesses
how are the shareholder’s share valued in the event that someone is exiting?
do shareholders have to commit a certain number of hours to the business each week or month?
how to deal with deadlocks and other disputes that arise, without resorting to legal proceedings or liquidating the company
what happens if a shareholder breaches the agreement? Can the other shareholders buy their shares and force them out? What is the price? Can the other shareholders demand compensation?
Tag-along and drag-along provisions
How does the constitution of a company fit in?
The constitution is also a written document governing how a company is run. The constitution is technical as it has to deal with a large range of Corporations Act issues. Almost all constitutions are template documents, i.e. they are produced by the firm that you buy your company from. The terms of the constitution are therefore not tailored to your needs, but are generic so that the terms are generally appropriate for most companies.
Can you get by with the template constitution instead of having a shareholders’ agreement?
Many template constitutions include basic pre-emptive rights, and some even include mediation provisions for shareholder disputes. These are important and helpful provisions, and if you are having a dispute with a fellow shareholder then these clauses in the constitution may assist. Most of the other provisions of a SHA will not be found in a template constitution.
A template constitution will not have been tailored to the specific arrangements of your business and is unlikely to be appropriate for your business and your family.
Can you alter a constitution instead of having a shareholders’ agreement?
You can, and sometimes this is appropriate, but not always. Constitutions are less flexible than a SHA. You can be more creative in a SHA.
There are times when a altering a constitution is necessary for corporate law reasons and a SHA is not able to achieve the desired outcome.
What is a unitholders agreement?
A unitholders’ agreement (UHA) is, effectively, a SHA but for a unit trust rather than a company. A UHA contains many of the same provisions as a SHA and deals with the same issues.
A UHA is generally more complicated than a SHA because it must allow for the terms of the Unit Trust Deed, and also it must deal with the shares in the corporate trustee of the unit trust.
Note that 100% of unitholders must sign the UHA for it to be properly effective, otherwise the terms of the Unit Trust Deed will override the UHA.
What is a Buy-Sell agreement?
A buy-sell agreement (BSA) can be for a unit trust or a company. It is an agreement between the owners of the business about how they will buy each other out on the occurrence of certain events, such as death, permanent disablement or retirement.
Not every company needs a buy-sell arrangement – it depends on the circumstances.
Do you need a BSA and a SHA?
If you have buy-sell arrangements, we recommend that because of the specific nature of buy-sell provisions that those terms be set out in a document just for that purpose, being a BSA.
Insurance in BSAs
Often buy-sell arrangements have life insurance incorporated into the arrangement as a means of ensuring there is sufficient funds available on exit. Each business owner has a life insurance policy specifically for this purpose, and if they pass away, the proceeds are deemed to have paid for their shares – so the other shareholders can receive the exiting person’s shares without having to come up with the funds to purchase. There are also partly funded arrangements, and vendor finance arrangements which can be put in place.
This works best for small and medium size businesses. For large businesses the value of the business is too high for life insurance proceeds to be a realistic funding option.
Please contact us to discuss how a shareholders’ agreement can protect your business.
We stand by all of the legal information on our website. However it is important to understand that it is not legal advice for you. Advice must be tailored to your circumstances, and every client’s circumstances are unique. If you try to apply the above information to your circumstances it may not lead to the outcome you seek. We would be most happy to provide tailored advice for you suited to your circumstances.