There is no legal obligation for a company in Sydney to possess a shareholder’s agreement; nevertheless, there can be significant advantages for businesses in Sydney to have one, particularly when seeking the expertise of accountants in Sydney.
We discussed shareholder agreements and the common areas that should be considered in our April 2014 newsletter (which can be found here). With the Banking Royal Commission results disclosing some severe weaknesses in Corporate Governance at the “big end of town“, we thought it was time to revisit shareholder agreements and company constitutions for smaller companies to strengthen Corporate Governance and reduce disputes and litigation.
A shareholder’s agreement is a binding contract that sets out their rights, obligations and procedures for specific situations to reduce the chance of a dispute.
A shareholder’s agreement is usually separate from the company constitution (the company’s rules) and only binds the parties who sign it. This is compared to the constitution, which applies to directors and shareholders, both current and future. Usually, the Constitution does not cover the practical provisions, so a shareholder’s agreement supplements the Constitution.
A shareholder’s agreement usually states that a unanimous written agreement of the shareholders can only amend the agreement. In contrast, the Corporation Act states that a constitution can be amended by the agreement of 75% of the shareholders.
A shareholder’s agreement can be tailored to suit the majority or minority shareholders. For example, a majority shareholder would want the exercise of power to be based on a majority vote. In contrast, a minority shareholder would want the exercise of power to be based on a unanimous vote.
A majority shareholder would want a “drag along” clause, which states that if the majority shareholder has a buyer for their shares based on acquiring 100% of the shares in the company, then the minority shareholders are dragged into the sale even if they do not want to sell.
A minority shareholder would want a “tag along” clause, which allows the minority shareholder to piggyback the majority shareholders’ sale so they can sell their shares in the same sale. The majority shareholder can not sell without the minority shareholder’s shares also being sold. This can protect minority shareholders from having the company run by a new party to which they haven’t agreed.
A shareholder’s agreement can also include many other areas that the constitution doesn’t include (covered in our April 2014 newsletter but summarised below):
- Circumstances when a dividend may be paid
- Shareholders’ Rights to board representation
- Process for transfer of shares
- Process for dispute resolution and/or mediation
- Process for the issue of new shares
- Business plans
- Insurance for the key persons
- Right to inspect company documents and/or premises
- Competition and trade restraints
- Death of a shareholder
- Voting on some issues to be unanimous or majority
If you have any queries with the above, don’t hesitate to contact this office.
Kreston Stanley Williamson Team
*Correct as of January 2019
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.