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  • Kyard Business Law

Shareholder Agreements

Updated: Sep 20, 2023

There are more than 3,000 pages of legislation covering companies in Australia. There are also thousands of cases decided each year on a range of issues and dozens of textbooks describing the law. Despite this weight of law, there are several gaps that Courts and the legislation do not fill because they take the view that if it was important to the parties, they would have entered into an agreement. Crucially, these include:

1. When someone can be forced to sell their shares (e.g. if they leave the company and set up their own competing business); and

2. What price will be put on shares.

There are some things that can be done even without an agreement but these typically require going to Court and seeking that the relevant company be wound-up and can cost potentially hundreds of thousands of dollars in complex litigation.

Instead, a shareholder agreement (or where a “unit trust” is involved, a unit holder agreement) should almost always be in place to avoid a ruinous fight that can destroy the value of the very assets being fought over.

There is no standard form of agreement but there are provisions often found in these shareholder agreements. These include:

• Provisions that mean that an employee or “partner” who leaves the business must sell their shares;

• Setting out whether shares must be sold if a shareholder dies or becomes unable to participate in the business;

• A restraint of trade provision and also confidentiality obligations so that someone is not paid for their shares and then be able to use that money to compete with the business of the Company;

• Allows for the possibility of death, total and permanent disability or absenteeism;

• A quorum (i.e. minimum number) for a valid meeting of directors or shareholders;

• Special majorities for some actions by the Company including, for example, the issue of more shares that might swamp a shareholder;

• An ability for one majority shareholder to “drag along” a minority shareholder where the majority shareholder wants to sell the shares to a third party;

• An ability for one minority shareholder to “tag along” with a majority shareholder who wants to sell their shares to a third party;

• A right of shareholders to receive more information about the company than is allowed for in the Corporations Act 2001;

• Details of how the Company will raise funds going forward – perhaps at first instance by loans from third parties as well as retained income rather than by loans by shareholders or the allotment of fresh shares to some shareholders but not other shareholders;

• A detailed process to work out a price for shares in various circumstances. This might include a reduced price if the departing shareholder has done something illegal or otherwise damaged the company.

• The shareholders agreement can also try to set up processes such as mediations to avoid litigation automatically happening if there is a disagreement among directors or shareholders.

• Some shareholder agreements include a business plan or budget and expect these to be adhered to by the board of directors.

• A well drafted shareholder agreement will also allow for new shareholders to be involved (whether by share transfers or allotments of new shares).

• Unfortunately, some shareholder agreements are badly drawn and can do more harm than good. It can be an utter disaster if the shareholders agree with the Company itself to provide funds if needed in a compulsory manner. This could be misused by a liquidator to mean that the shareholders can be at risk of the liquidator forcing them to pay out all creditors of the Company.

• We have seen clauses that blatantly favour one shareholder and others that establish a share price that can led to grossly unfair circumstances.

Kyard Business Law takes the view that while we can suggest approaches and clauses and even a draft agreement to our clients, we listen to our clients first to make sure that the document will indeed meet your needs and not merely our expectation of what you might wish.

This article is a brief summary of a complex area that is very much contingent of the precise facts. It is therefore not a substitute for detailed legal advice. While the key concepts have application in other jurisdictions, the relevant Law is that of Victoria as at May 2023.

Photo: Christina Morillo 2023

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