A common mode of entering into a new business with co-investors/partners is through the establishment of a new proprietary limited company in which each party holds shares equivalent to their proportional ownership.
But what rules govern the interaction between the new business partners and what rights do they have in the operation of the company and the business?
Whilst the Corporations legislation provides some basic protections and general regulation for shareholder interaction, it is not a complete roadmap for business operation. A company constitution is often useful to fill that gap but, in reality, many organisations either do not have a constitution or have a basic ‘off the shelf’ document, provided to them at the time the company was set up which does not properly cater to their individual circumstances.
A Shareholders Agreement can be a great resource for new businesses to fill this gap- both in ensuring that each partner’s expectations are met in relation to the company’s operation and their role within it and also in establishing a rule book for when things go wrong as between business partners.
A Shareholders Agreement can work alongside the company’s constitution and, if drafted appropriately, can overrule provisions of a constitution which have become outdated or are not appropriate given the present nature or structure of the business.
When putting together a Shareholders Agreement (or reviewing one that has been proposed), one should look for provisions that deal with a number of key items including (but not limited to):
- How the board of directors is to be configured and who is entitled to become a director.
- What powers the directors will have and how management decisions are to be made.
- What influence Shareholders will have over decision making and when shareholder approval is required.
- How profits are reinvested or dividends paid.
- How any shareholder loans are dealt with (including interest and repayment terms).
- Whether any non-compete obligations apply to shareholders and their key persons.
- How offers to purchase the business will be dealt with (for example, can the majority compel a minority to sell?).
- What happens if one party dies or is totally and permanently disabled (i.e. are their successors compelled to sell their shares? Is key person insurance required to fund a share purchase?).
- How will shares be valued in circumstances where a party wishes to sell their shares?
- How are disputes between the parties to be resolved? (for example, does it set out a procedure for alternative dispute resolution such as mediation prior to any court proceedings being issued?).
Its also important to remember that each business is unique and so it may also be critical to include provisions which are tailored to the business, the long term goals of each shareholder and which cater specifically to the nature of the company’s products, services and workforce.
For example, a company which will be developing or holding valuable intellectual property (IP) assets may require provisions which deal specifically with ownership of those IP assets and any restrictions on the use or commercialisation of those assets by the parties in the future. Another circumstance might be where one party plans to actively work in the business while others do not, in which case, establishing the roles of each party, their individual inputs and the compensation each might receive for their time and effort may be a critical inclusion to ensure fairness.
Other customised inclusions might include: rules for the issue of new shares, lock-in periods preventing share sales in the business infancy period or even the inclusion of an agreed Business Plan for the company.
In such circumstances, a customised Shareholders Agreements can be critical and having the guidance of a trained legal eye will be indispensable. In this respect, it is important to understand that each shareholder should ideally obtain their own independent legal advice on the terms of a proposed Shareholders Agreement. Oftentimes, shareholders’ interests and priorities will diverge so it is prudent that parties obtain advice from someone who is engaged to provide guidance solely on their rights and obligations rather than those of the collective.
If you require assistance in assessing your commercial needs and compiling (or reviewing) a Shareholders Agreement that works for you, contact Rankin Business Lawyers for practical, on-point commercial legal guidance.