If you are starting a new business venture in partnership with someone else, it is highly advisable to put in place a Shareholders/Partnership Agreement. We regularly receive enquiries from people who have not done so, and when a dispute breaks out it can be a messy exercise to clean up the mess because the legislation doesn’t provide the neatest of methods to manage an exiting partner or dispute.
Below we provide some FAQs regarding Shareholders Agreements and why they are important for business. Similar considerations apply for Partnership Agreements – a company and partnership are different structures for a jointly owned business, but many of the considerations are similar.
What is the difference between a Constitution and a Shareholder Agreement?
It is most likely that the company has a constitution, but this does not usually provide protection for shareholders in the event of a dispute or if a party wants to exit.
A constitution is a binding contract between the shareholders of a company and specifies who has the control of the company, how it is owned and managed (ie by the directors and shareholders at board and member meetings).
A Shareholders Agreement augments and often alters these fundamental areas and will usually address the above matters listed as well as:
- describing the overall objectives of the venture;
- employee share plans;
- any additional powers provided to one or a group of shareholders.
Why should I have a Shareholders Agreement?
These agreements provide the framework for the governance of your new venture and outlines the key issues such as:
- each shareholder’s rights and obligations (eg where some shareholders are contributing particular skills)
- how the venture will be funded and how further capital can be added to the venture
- what to do if someone defaults and resolution of disputes
- exit strategies and how each shareholder may transfer their shares
- valuation of each party’s shares
- how fresh shareholders can be accepted to the company – any particular considerations for new share issues and how they dilute the existing shareholders’ interests
A Shareholders Agreement should be tailored so it is specific to your company and its circumstances, but should also be flexible enough to deal with an evolving business environment and a change of plans for the business. Therefore it is important to get advice and have the Agreement drafted by an experienced lawyer so the documents reflect the requirements of the company’s members (both majority and minority) whilst ensuring it complies with the requirements of ASIC and the Corporations Act.
When to do it?
As soon as possible.
A Shareholders Agreement can be drafted and entered into at any time but it becomes more difficult to get agreement as more people join the company.
What next?
As noted above, it is important to have a Shareholders/Partnership Agreement drafted by an experienced commercial or corporate lawyer as there could be serious ramifications for you as a shareholder and also for your company should it not be drafted to cover all necessary areas.
At Nevett Ford, our Corporate and Business Team work with company owners to prepare comprehensive Shareholder Agreements and if you have any questions, they can be contacted on 03 9614 7111 or by email at melbourne@nevettford.com.au.