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Commercial Contracts, Corporate Governance

WHY DO I NEED A SHAREHOLDERS AGREEMENT?

THE PBL KEY 5 TIPS AND TRAPS TO AVOIDING EXPENSIVE SHAREHOLDER DISPUTES.

Over the course of more than 20 years practicing business and company law I have been approached on countless occasions by stakeholders asking me the following questions:

“I am in a dispute with my partner. What can I do about resolving the dispute? Or How can I get out of the Company? Or we don’t agree on anything and I want him or her out. How do I go about it?”

The answer will often be a question: “Have you entered into a shareholder’s agreement?”

Mostly stakeholders look at me blankly and say either: “What’s that?” or “I don’t think so”. They may also say to me “But we have a company constitution. Isn’t that enough?”

Well unfortunately the answer is going to be a resounding NO!!

The fact of the matter is that the Constitution deals with some but not all of the issues that arise in running a company business and owning shares in a company

Often it will be useless for stakeholders who each have a 50% ownership in the shares of the Company and will certainly be useless for dealing with retirement or involuntary exit from the Company and disputes.

So why do Shareholders as Directors need a good binding shareholders agreement?

Apart from the issue of the Constitution referred to above, I list the PBL key 5 reasons:

  1. Because with few exceptions the Courts are loath to make judgements on commercial arrangements and will not necessarily give any relief to fighting shareholders in the absence of a shareholder’s agreement
  2. Because the Corporations Act 2001 only gives remedies to resolve matters in certain exceptional circumstances. For example, where a minority shareholder has been unfairly oppressed or where there are grounds to wind up he Company under Section 461 of that Act
  3. Because a well drafted shareholders agreement will set out important terms and conditions which are binding on each of the shareholders to resolve disputes in the form of a Dispute Resolution Clause
  4. Because the shareholders agreement will set out the rules to be followed for each director and shareholder to manage and operate the Company business which will assist in avoiding disputes
  5. Because the agreement will also contain the most important provisions of all to enable a proper fair and equitable arrangement to be put into place if a shareholder wants to exit from the Company whether voluntarily or involuntarily (Hopefully it will also refer to insurance policies that are in place to cover situations where directors or key persons die , became permanently disabled or suffer trauma so that there will be place a safety net to pay out a shareholder in those circumstances)

In order to avoid a nasty surprise when you seek legal advice concerning shareholder or director disputes then it is well worth your while to have lawyers such as those at PBL to review your current arrangements and if necessary implement a strategy to ensure all documents including a shareholder’s agreement are in place.

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