Shareholder Agreements

Shareholder agreements – regulation and protection

A company’s internal management is governed by the Corporations Act 2001 (known as the replaceable rules), the Constitution, or a combination of both. The Constitution and replaceable rules are contracts between members and the company, members and the directors and between each member on how the company shall be managed and operate. 

The shareholders agreement is a contract between the company shareholders which details how the company should be operated and the shareholders’ rights and obligations. It will include information on the regulation of the shareholders’ relationship, the management of the company, ownership of shares and protection of shareholders that is different from that set down in the replaceable rules and Constitution. 

The shareholder agreements are used to supplement (or supersede) the constitutional documents of the company for the following reasons:

• Contractual arrangements are generally cheaper and less formal to form, administer, revise or terminate.
• The shareholders might wish to provide for disputes to be resolved by arbitration.
• Corporate law may not provide sufficient protection for minority shareholders who may seek to better protect their position by using a shareholders’ agreement.

Shareholder agreements normally regulate the following matters:

• The ownership and voting rights of the shares in the company.
• Restrictions on transferring shares or granting security interests over shares.
• Pre-emption rights and rights of first refusal in relation to any shares issued by the company (often called a buy-sell agreement).
• Control and management of the company, which may include power for certain shareholders to designate individuals for election to the board of directors.
• Dispute resolution provisions.

It is recommended that all companies with non-family related shareholders have a shareholder agreement to protect the shareholders in the event of a dispute. Shareholder disputes are very common and almost inevitable over time. The shareholder agreements need to be drafted by a solicitor or purchased online from a legal site.