There’s many pro’s and con’s to consider when growing a small business with other people as business partners. 

From my experience, business partners are a force multiplier. 

When it works well, having business partners in place is a huge advantage to both the speed and experience of building a business. 

Unfortunately, the opposite is also true. 

When things are not working well, partnership disputes are a major disruptive force in slowing business growth and creating drama that only distracts from the enjoyment of building a business.

A shareholders agreement is a key tool to help you manage this issue. 

A shareholders agreement is a contract between the shareholders of a company. 

This agreement sets out the rights and responsibilities of each shareholder, as well as how the company will be run. 

The agreement can also include provisions for things like how disagreements will be resolved, what happens if a shareholder wants to sell their shares, and what happens if the company is sold. 

In this blog post, we'll take a look at what a shareholder agreement is, and whether or not you need one for your business.

What is a shareholders agreement?

One of the main tools you need when embarking on the journey of working with business partners is a shareholders agreement. 

In fact, I would go as far as to say it is a mandatory document to have in place when working with business partners. 

A shareholders agreement may be better termed a shareholders disagreement - because the only time you really need it is when there is disagreement. 

But when the unexpected happens, it’s a business owner's best friend.

A good shareholders agreement will ensure the provisions in the contract look after the business first, (because the business is what feeds us all), and then consider how to fairly look after individual shareholders rights.

A shareholders agreement, which clearly outlines the agreement between the parties (and procedure to be followed in the event of dispute), can be an effective tool for avoiding or limiting the cost of litigation.

A shareholders agreement may set out up front how disputes and deadlocks are to be resolved, and may allow shareholders to resolve issues which arise - quickly and with finality.

A shareholders agreement is a private contract made between all the shareholders of a company, setting out the rights, obligations and liabilities of each shareholder. 

Such agreements do not have to comply with any set form or procedure, but should be drafted so as to ensure that the agreement is clear, valid and enforceable.

A shareholders agreement requires the consent of all shareholders to be bound and, unless otherwise specified, all the existing shareholders must consent to any changes or alterations.

Do I need a shareholders agreement?

If you have more than one shareholder in your company, it's important to have a shareholders agreement in place. 

This document can help to prevent disputes between shareholders, and can provide clarity on what everyone's roles and responsibilities are. 

Having a shareholders agreement can also make it easier to sell equity in your business later on down the track, as potential buyers will know exactly what they're getting themselves into.  

Plus, if your business is ever involved in legal proceedings, having a shareholders agreement can help to protect your interests.

So, while having a shareholders agreement isn't compulsory, it's definitely something worth considering for your business. 

When a company is created, and there is considerable goodwill between the shareholders, a shareholders agreement might not seem necessary. 

However, it’s easier to negotiate a shareholders agreement at the start of a business venture when issues can be discussed amicably, rather than when parties are frustrated by disagreements down-the-track.

All proprietary companies are deemed to have a constitution upon incorporation. 

It might be assumed that a company constitution is sufficient to address the rights and obligations of shareholders, but the deemed form (and in fact, most standard company constitutions) are usually limited in scope and focused on setting out the company’s objectives, activities and internal administrative matters. 

A standard company constitution will not protect a shareholder’s interests in the event of a dispute between the parties, or where issues arise that are not covered by the constitution.

In contrast, a shareholders agreement can be an extremely useful legal document for managing any issues affecting shareholders which might arise in the future and are not covered by the constitution.

What to include in a shareholder agreement?

For a shareholders agreement to be useful, it needs to be customised to meet the specific requirements of the company and its shareholders.

Here are some common provisions which most shareholder agreements should contain:

• Primacy of the shareholders agreement over the constitution - in the event of any inconsistency between the shareholders agreement and the constitution, you want the shareholders agreement to prevail. This may require a provision where the shareholders and directors agree to take such steps as are necessary to amend the constitution.   
• Alternative dispute resolution - to avoid the cost and uncertainty of litigation, it is often advisable that parties be required to try and resolve their disputes through alternative dispute resolution, before any formal litigation can be commenced.
• Deadlock breaker - such provisions deal with circumstances where shareholders cannot agree on the management of the company. They can include:
• A shotgun clause - which works by allowing a shareholder to break the deadlock by purchasing the shares of the other shareholder at a nominated price.
• A chairperson clause - which allows one shareholder to become the chairperson and have a casting vote; or
• A liquidation clause - which provides that the company is to be voluntarily wound up if the deadlock continues for a set period of time.
• Pre-emptive rights - which impose restrictions on the transfer of shares. A provision can require exiting shareholders to offer their shareholding to existing shareholders first, before the shares are offered to outside parties. Be sure to set a mechanism for determining the price.
• Drag-along or tag-along rights - provisions which are aimed at balancing the rights of a majority shareholder and one or more minority shareholders. Under a drag-along option, majority shareholders can require a minority shareholder to join in the sale of shares in the company. Under a tag-along option, if a party (perhaps the majority shareholder) is selling shares in the company, the other (perhaps minority) shareholder has the right to join the transaction and sell their minority stake at the same price as the majority shareholder achieves.
• Mandatory sale events - a provision which sets out triggers for the mandatory sale of shares in certain circumstances (eg. a shareholder dies, is divorced, resigns as director or files for personal bankruptcy).
• Share valuation methods - it is prudent to set out the method by which shares are to be valued, in relation to pre-emptive rights and mandatory sale events. For example, shareholders agreements often provide for the appointment of an external valuer with set criteria for valuation.

If you're thinking about developing a shareholders agreement, it's important to seek legal advice to ensure that the agreement is fair and equitable for all shareholders. 

A shareholders agreement can be a complex document, so it's important to get professional help to ensure it meets your needs.

I’m having problems with my business partner, is it too late?

Far too many business partnerships are not set up with a shareholders agreement in place. 

Chances are, at some point a dispute or difference in opinion will arise where a shareholders agreement would be highly valuable to help navigate through these issues. 

It may be the case that one shareholder is not doing their agreed tasks, they disagree on a major strategic move or they have expectations on key items such as dividend payments or equity contributions that aren’t agreed to by the other shareholders.

It’s never too late and is always still possible to develop a shareholders agreement, even though it always gets a little harder as the business and relationships mature. 

If relationships are getting strained, it’s more important than ever to get some independent support to help develop and facilitate a shareholders agreement. 

How do I put together a Shareholders Agreement?

Developing a shareholders agreement involves a few key steps:

1. Understanding the key provisions you need to include in your shareholders agreement
2. Agreeing a fair and equitable way to manage the key provisions included in the document. This is often a process of negotiation, mediation and agreement between shareholders, and can be a lengthy process if any major differences arise, and
3. Ensure the document is legally valid and enforceable.

There are a few avenues to consider when looking to develop a shareholders agreement. 

Traditionally, these sort of agreements were developed by commercial solicitors of which there are many in the market offering this service today. 

Some of the drawbacks noted when using solicitors is that it can get expensive, particularly if there is a lot of backwards and forwards as the shareholders look to achieve agreement on the key provisions being covered.

Increasingly business owners are turning to a growing segment of low cost online legal templates and tools that cover shareholders agreements. These include sites such as Lawpath and Legal Vision. 

Whilst inexpensive and a great starting point, they don’t offer a lot of support to help negotiate agreement or advice on how to structure some of the key provisions, to ensure they are fit for purpose for your individual business.

A third option is to engage a commercially minded facilitator who may be able to work with existing tools and templates and then facilitate and support the decision making required to develop any templated solutions into a useful working document. 

This would typically be cheaper than using a solicitor for the full end-to-end process.

Typically, good advice here is to get a solicitor to at least finalise the agreement that you develop, provide advice on any noted issues and ensure it is legally enforceable if required.

Conclusion

If you're wondering whether or not you need a shareholders agreement for your small business in Australia, the answer is that if you have equity partners, then you probably should. 

If you have more than one shareholder, it's definitely worth putting an agreement in place so everyone knows what their rights and responsibilities are. 

Plus, having an agreement in place can help to prevent disputes down the line, and make it easier to sell your business.

A shareholders agreement is best prepared before you get started on your new business venture, and when everyone is still friends. It's then much easier to reach agreement on how to equitably manage potential issues if they arise in future

A shareholders agreement should be professionally prepared as it needs to be tailored to the particular needs of the shareholders and company, but will usually contain some of the key provisions set out above.

If you are in partnership with someone else, and would like some direction and support to develop a shareholders agreement, start by joining our Community, and asking our network for someone who might be able to help with what you need. 

We hold two webinars a month:

• A Mastermind, where an expert goes deep on a topic (eg. recruitment), and 
• A Group Coaching session -  small business owners in the Community put forward their business issues and growth challenges, and Michael, Troy and I (and the other Community members) chime in with how we would tackle those problems.