In this article, we discuss the basics of shareholder agreements in Australia, why they are needed, important clauses to include, and how they connect to Shareholder Arrangements & Capital Raising.
What Is a Shareholder Agreement?
A shareholder agreement is a private contract among a company's shareholders that governs their relationship and prescribes how the business is run. Unlike a company constitution, which is a public document registered with the Australian Securities and Investments Commission (ASIC), a shareholder agreement is not public and contains more specific provisions to cater to the shareholders' requirements.
Why Is a Shareholder Agreement Important?In the absence of a shareholder agreement, confusion and conflicts might occur, with the outcome resulting in expensive law suits. Such an agreement outlines clearly:
Each shareholder's obligations and responsibilities.
The procedure of raising funds.
Dispute resolutions procedures.
Each shareholder's exit strategy.
Methods of distribution of dividends and money matters.
Basic Components of a Shareholder Agreement
A valid shareholder agreement involves the following stipulations:
Shareholder Rights and ObligationsThis section establishes the function of every shareholder, their voting rights in matters of the company, and their responsibility in ensuring the success of the company. It also stipulates limitations on share transfer to third parties.
Capital Raising StrategiesFirms usually need to raise more money to expand. This part explains how the firm can raise funds, either by issuing new stock, borrowing, or outside investment. It also explains how existing shareholders can be safeguarded in such a scenario.
Decision-Making ProcessesThe accord would specify decision-making processes, where decisions needing every member's nod and decisions passed by majority must be determined. This avoids squabbles about significant business transitions like mergers, acquisitions, or capital reconstruction.
Share Transfer and Exit ClausesShare transfers and exit protocols clearly establish continuance in operations. Some major points to put in writing include:
Pre-emptive rights – Granting current shareholders the first opportunity to purchase shares prior to sales to third parties.
Drag-along rights – Allowing majority shareholders to compel minority shareholders to sell on company sale.
Tag-along rights – Granting minority shareholders the right to exit along with majority shareholders.
Buyout clauses – Specifying valuation and method for a shareholder exit.
Dispute Resolution MechanismsShareholder conflicts can be injurious. A good partnership agreement has provisions for resolving disputes, including:
Mediation or arbitration prior to court action.
Deadlock-solving mechanisms for voting.
Removal procedures for a shareholder if required.
Dividend Policy and Distribution of ProfitsThis provision identifies when and how profits will be distributed to shareholders. It gives clarity regarding payment of dividends and ensures equitable treatment of all shareholders.
Confidentiality and Non-Compete ArrangementsFor safekeeping of company secrets, the shareholders can be asked to agree to confidentiality and non-compete agreements. They cannot reveal confidential company information or establish a similar business within the agreed time duration.
Governing Law and ComplianceThe contract shall clearly state that it is done according to the laws of the corporations in Australia and as stated by ASIC, as well as the Australian Taxation Office (ATO).
Shareholder Arrangements & Capital Raising in Australia
Legal Considerations for Raising CapitalCapital raising in Australia is regulated by various laws, including the Corporations Act 2001 (Cth). There is a requirement for compliance in issuing shares or raising external funding. Key aspects to consider are:
Disclosure provisions under the Corporations Act.
Prevention of contravention of the Australian Securities and Investments Commission (ASIC) guidelines.
Effect on dilution of shareholders.
Funding Options for Business GrowthBusinesses have many options available for raising capital. The most typical methods are:
Equity FinancingThis requires issuing new shares to investors in exchange for capital. Shareholders need to agree on how new shares are distributed and the privileges of new investors.
Debt FinancingEnterprises can borrow money or issue company bonds to obtain capital. A shareholder agreement must specify how debt will be paid back and if shareholders must give personal guarantees.
Convertible NotesA cross between debt and equity, convertible notes enable investors to swap their loans for equity at a future time. Conversion terms and their effect on current shareholders should be outlined in agreements.
Addressing Shareholder Conflicts over Raising Capital
Conflicts usually occur when current shareholders perceive their interests are being watered down or that they do not agree with the funding approach of the company. Solutions are:
Having well-defined voting rights regarding capital-raising.
The use of protective measures for minority shareholders.
Establishing exit strategies for non-participating shareholders.
Protecting Minority Shareholders
At some point, a shareholder might want to leave the business. A properly defined agreement avoids disruptions and smooths the exit. Typical exit options are:
Sale of shares to current shareholders.
Sale to third-party buyers (subject to pre-emptive rights).
Company buy-backs.
Business winding-up and asset distribution.
Exit Strategies for Shareholders
Conflicts usually occur when current shareholders perceive their interests are being watered down or that they do not agree with the funding approach of the company. Solutions are:
Having well-defined voting rights regarding capital-raising.
The use of protective measures for minority shareholders.
Establishing exit strategies for non-participating shareholders.
Tax Implications for Shareholders
The Australian Taxation Office (ATO) places several tax implications on shareholders, including:
Having a shareholder agreement is a useful tool in preserving your business as well as supporting long-term viability. If you are setting up a new enterprise or operating a current company, having a contractually binding shareholder agreement ensures protection of interests from all involved stakeholders.
If you require help with writing or reviewing a shareholder agreement,
Contact New South Lawyers today to guarantee your business meets Australian corporate regulations and best practices.
