When should you have a shareholder’s agreement in addition to the company’s constitution?

When should you have a shareholder’s agreement in addition to the company’s constitution?

There is no legal requirement for a company to have a shareholder’s agreement, however there can be significant benefits of having one.

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 serious weaknesses in Corporate Governance at the “big end of town“ we thought it was timely to revisit shareholder agreements and company constitutions for smaller companies, as a way of strengthening Corporate Governance and reducing disputes and litigation.

A shareholder’s agreement is a binding contract between shareholders which sets out their rights, obligations and the procedures for certain situations, to reduce the chance of a dispute.

A shareholder’s agreement is usually separate to the company constitution (which are the rules of the company) 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 is used to supplement the constitution.

A shareholder’s agreement will usually state that the agreement can only be amended by unanimous written agreement of the shareholders, whereas the Corporation Act states that a constitution can be amended by agreement of 75% of the shareholders.

A shareholder’s agreement can be tailored to suit the majority shareholders or the minority shareholders. For example: a majority shareholder would want the exercise of power to be based on a majority vote, whereas the 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 on the basis of 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 piggy back the majority shareholders sale so they can sell their shares in the same sale. The majority shareholder can not sell without the minority shareholder 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
  • Confidentiality
  • Competition and trade restraints
  • Death of a shareholder
  • Voting on certain matters to be unanimous or majority

If you have any queries in relation to the above don’t hesitate to contact this office.

Kreston Stanley Williamson Team

*Correct as of January 2019

*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to 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 contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under professional standards legislation.

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