Shareholders Agreement – Why You Need One

If you co-own a company with someone else, or if you are in the process of establishing a company with someone else, then you need to think about a shareholders agreement.

What is a Shareholders Agreement?

A shareholders agreement is a confidential ‘living’ document, as between the shareholders of a company. It includes provisions surrounding matters such as:

• Business plans and budgets.
• Management and structure of the company.
• Decisions to wind up the company and exit provisions.
• Approving major transactions and issuing further shares.
• Funding business activities and incurring debt.
• Admitting new shareholders.

It is important that all of the shareholders within your company are ‘on the same page’ in respect of these matters, so that you can confidently look to the future and grow the company’s business .

‘In Business Together Is Never Forever’

All business relationships come to an end – whether as a result of a relationship breakdown (at one extreme) or as a result of the death of one of the co-owners (at the other extreme), with many other reasons in between. But when you are in the throws of creating a new joint business venture, with all the positive energy and enthusiasm that entails, this fact is all too often forgotten with little thought given to planning for that reality.

In our experience, the following issues are best considered, discussed and planned for before the event.

1. Sale of Shares: A shareholder wants to sell their shares in the company. Should that shareholder be able to sell those shares to any third party, or should they be offered to the other existing shareholders first?
2. Death & Disability: A shareholder becomes permanently disabled and unable to work, or dies. Should the disabled shareholder or the deceased shareholder’s estate continue to receive dividend income? Perhaps it would be appropriate to put life, trauma and/or total permanent disability (TPD) insurance policies in place for each shareholder to fund a buy out of the disabled or deceased shareholder’s shares in the company?
3. Management Deadlock: There is a management deadlock. Should there be a dispute resolution process, and what happens if the deadlock cannot be resolved?
4. Domestic Relationship Breakdown: The domestic relationship (eg. marriage) of one of the shareholders breaks down. A shareholder’s shares in the company may be subject to division upon the breakdown of their domestic relationship. In these circumstances, would it be appropriate to provide that no-one can become a shareholder without the remaining shareholder’s consent? Alternatively, you and your fellow shareholders may think it is appropriate to protect your shares by entering into an appropriate ‘asset protection’ structure now, before things get messy.

If you would like further information about shareholders agreements, then please give us a ring on 04 970 3600. We would be happy to help.