Understanding Shareholder Agreements in NSW

Shareholder Agreements

21st October, 2024

 

Companies in Australia rely on shareholder agreements to outline the rules and processes governing the relationship between shareholders and the company. This agreement defines shareholders’ rights and obligations, helping to avoid disputes and ensuring smooth business operations.

 

Shareholder Agreements vs. Company Constitution

While a shareholder agreement complements the company constitution, it can also override it. A company constitution outlines the rules for managing a company, covering decision-making processes, director powers, shareholder rights, and meeting procedures. This document provides a framework for company operations and ensures clarity in governance.

 

Importantly, shareholders can amend a company constitution with a 75% vote, while a shareholder agreement requires unanimous consent for changes. This aspect is crucial for protecting minority shareholders from majority control.

 

The Corporations Act 2001

The Corporations Act 2001 (Cth) establishes a basic legal framework for companies. In the absence of a shareholder agreement or company constitution, the Act’s default rules will apply. However, these rules only provide a basic structure for governance. They do not cater to a company’s specific needs, making tailored agreements essential.

 

Essential Features of a Shareholder Agreement

A well-crafted shareholder agreement may include several important clauses:

 

  • Deadlock Provisions: These provisions resolve situations where critical decisions stall. For example, if three equal shareholders cannot agree on hiring a new CEO, the deadlock provisions will outline a process to break the impasse, ensuring the company can continue operations.
  • Pre-emptive Rights: These rights allow existing shareholders to purchase shares before outsiders can make offers. For instance, if one shareholder wants to sell their shares, pre-emptive rights ensure that the remaining shareholders have the first opportunity to buy those shares, protecting their investment.
  • Restraint Clauses: These clauses prevent shareholders from competing with the company or soliciting clients during and after their tenure. If a shareholder decides to start a competing business, this clause can protect the company from losing clients and market share.
  • Exit Strategies: These outline mechanisms for shareholders to exit the company, including buyout options. For example, if a shareholder wants to leave after the company has grown significantly, the exit strategy will specify how to determine a fair buyout price.
  • Board Composition: This section defines how the board is formed and details the decision-making process. It can ensure that key decisions, like appointing directors, reflect the interests of all shareholders.
  • Reserved Matters: Important decisions requiring special majority approval can shift power from directors to shareholders. For instance, if the company plans to sell or incur significant debt, this clause ensures that all shareholders have a say.
  • Tag Along and Drag Along Rights: These rights protect minority shareholders during share sales. Tag along rights allow minority shareholders to sell their shares on the same terms as majority shareholders, while drag along rights ensure that minority shareholders must sell if a majority shareholder finds a buyer.

 

Shareholder agreements play a crucial role in safeguarding shareholder rights and facilitating effective company operations. At Castrikum Adams Legal, we specialise in drafting comprehensive business agreements, including shareholder agreements, to meet your specific needs. Contact us today on 66871167 to learn how we can assist you in protecting your interests.

 

If you found this blog post informative and want to dive deeper into related topics, we invite you to check out our other blog posts.