A shareholders’ agreement is a binding contract that regulates the rights and obligations of shareholders. Such agreements establish rules governing the operation of companies and how specific events must be conducted.
Unlike the replaceable rules or a constitution required by the Corporations Act 2001 (Cth), shareholders’ agreements are not compulsory. However, upon incorporation, or when bringing a new investor into a corporation, members of companies often prepare and execute shareholders’ agreements to regulate their rights and obligations and various aspects of the company’s management.
It is both good practice and prudent risk management to prepare and use a shareholders’ agreement for shareholders in proprietary limited companies. These can act as a “rule book” for shareholders, and also separate the private arrangements of shareholders from the company constitution.
A shareholders’ agreement can serve a multitude of purposes, all of which work to protect the company and its value to shareholders: it can help avoid disputes, by establishing rules for foreseeable events; it can reduce disruption in the business, by providing a mechanism for resolving issues; it can facilitate growth, by outlining processes for the acquisition and disposal of shares; and it can protect shareholders’ interests, by defining their rights, obligations, and potential liabilities.
Among other matters, a shareholders’ agreement should (subject to applicable legislation):
- define the rights and obligations of shareholders between themselves;
- set out how shareholders will exercise control in the board;
- determine a fair way for a shareholder to exit the company;
- determine how decisions are made; and
- describe how conflicts and changes of shareholders will be managed.
The implementation of a shareholders’ agreement is simple commonsense governance practice for any proprietary limited company wishing to establish clarity in relation to the proper conduct of its business.
Rankin Business Lawyers is a commercial law firm that specialises in all aspects of corporate law matters. Companies requiring assistance in assessing commercial needs and compiling (or reviewing) a shareholders’ agreement should contact us for practical, on-point legal guidance.
