Why every Business needs a Shareholder Agreement

There is a common misconception that only large companies and organisations need to implement a shareholder agreement within their business, but this isn’t necessarily true. A shareholder agreement, which is a document between the owners (shareholders) of the company, sets out the rights, responsibilities, and obligations of each shareholder as it relates to the business as well as provides a clear mechanism for how disputes are to be resolved if and when they arise.  

While companies in Australia are governed by the Corporations Act 2001 (Cth) and the company’s constitution, a shareholder agreement provides additional clarity and protection beyond these general provisions. A shareholder agreement isn’t a one-size-fits-all document and should be drafted in a way that suits your business needs and industry.

What are the key reasons every business should have a shareholder agreement? 

Clarifies roles and responsibilities

In the excitement of starting and launching a business, it can be easy to overlook the importance of clearly defining what each shareholder’s role and responsibilities in the running of the business should be. 

When you prepare a shareholder agreement at the beginning of your business lifecycle you can avoid many misunderstandings between the parties regarding their roles and what each shareholder’s level of decision-making may look like ensuring all parties are aligned and on the same page from day one - a crucial element in early business success.  

Minimises disputes and resolves conflicts

There are many reasons as to why a disagreement or dispute may arise between shareholders, such as differing opinions on business direction, who has operational control and what is each party’s financial contributions now and in the future. 

A well-thought-out shareholder agreement can provide clarity on how disputes, when they arise, are to be resolved between the shareholders, which reduces the risk of business interruption and expensive disputes so that the owners can get back to doing business. 

Provides clear exit strategies - voluntary and involuntary 

What happens if a shareholder wishes to exit the business, sell their shares, or passes away? Or if a shareholder transfers or sells their shares to a third party without consent, declares bankruptcy, or commits a criminal offense? 

Without a shareholder agreement in place how a company and its owners deal with any of the above circumstances can be unclear and lead to disputes between the parties. The shareholder agreement can therefore clearly outline the process of how a shareholder can transfer or sell their shares, what is to occur to a shareholder’s shares when they pass away, and also implement clear procedures for what is to occur to a shareholder’s shares when they are in default of their obligations under the agreement. 

Financial contributions

So you’ve launched your business and you are growing quickly but to get to the next level you need some cash injection - but without a shareholder agreement in place how do you deal with additional capital contributions from your shareholders? 

On the other hand, the shareholders made sure prior to launching their business they contacted Vesta Law to prepare their shareholder agreement which included provisions on how additional capital contributions are to be made which means the business owners are clear on what their next steps are to obtain these additional funds so they can take their business to the next level. 

We understand that in the early stages of business, business owners are busy managing many different priorities, and preparing a shareholder agreement is the last thing on the to-do list. But more often than not it is these businesses who, when facing shareholder challenges or a dispute arises with a co-owner, without a well-drafted shareholder agreement in place, resolving these issues can become complicated, expensive, and a time drain on the business. 

Next Steps

Every business, whether a small family-owned business or a larger company, can benefit from having a well-drafted shareholder agreement in place. This agreement should clearly define the roles and expectations of each of the business owners, outline how a shareholder may exit or be exited from the business, and also provide a clear mechanism for how disputes are to be resolved. 

Whether you are just about to launch a new business or have been running your business for a while now - reach out to one of our experienced legal advisors at Vesta Law to see how we may help you prepare a shareholder agreement tailored to your specific business needs and industry.