A shareholders agreement is a legally binding contractual agreement that outlines the relationships between the shareholders of a business. It is an important document that helps all shareholders understand their rights and responsibilities.
Shareholder agreements are usually created at the start of a business partnership, when all parties are enthusiastic and committed to the business. Having a shareholder agreement can help your business run smoothly and provides it with some long term stability.
This guide will help you understand the items that can be described in a shareholder agreement. We’ll also share the key benefits of using a shareholders agreement.
Understanding business partnerships
A business partnership refers to a group of people who have agreed to pursue a specific business objective for their mutual benefit. Partnerships allow multiple people to come together and share the responsibilities, risks, and profits associated with running a business.
A business partnership is created when the parties enter into a legally binding agreement. It is less formal than a company agreement which must be registered with the ASIC under the Corporations Act.
There are two types of business partnerships available:
- General partnership
The partners conducting the business have unlimited liability, which means their personal assets are liable to the partnership’s financial obligations
- Limited partnership (LP)
An arrangement where one or more of the partners are financially liable only to the extent of the amount of money that partner has invested.
Each state and territory has a Partnership Act that sets out the rules surrounding partnerships. Limited partnerships must be registered with the state government while incorporated limited partnerships must register with ASIC.
While each state or territory’s Partnership Act sets out many ground rules for partnerships, it does not cover many aspects of running the business. That’s why it is important to have a shareholders agreement in place that specifies how the business should be run.
If a partnership agreement is not created, shares of a partnership may be inferred according to the rules set out in the Partnership Act. This can lead to messy legal proceedings if a business relationship sours.
What kind of items can be included in a shareholder agreement?
Shareholder agreements are legal frameworks that cover many aspects of how a partnership operates, including:
- The general direction of the business and its objectives
You can specify what the objectives of the business are. This may include the types of products and services will be sold, how long the business will continue for, and how capital will be invested.
- The financial contributions that each partner will be making
Some partnerships have a single partner providing the financial backing while others contribute management skills or labour. You can use a shareholders agreement make rules regarding ongoing financial contributions from partners or what will happen if the business requires additional funding.
- How often the partners will meet and what voting rights each partner has
Specifying how often the partnership meets ensures that all partners remain involved with business decisions. Spelling out voting rights for each partner can help avoid disputes between partners.
- Rules for the sale or transfer of business shares
Your business may require special arrangements for the sale of a partner’s shares. For example, you may require rules regarding who the shares can be sold to or how much the shares can be sold for.
- The management structure of the business
The shareholders agreement can list the management team in charge of the day-to-day operation of the business. It can also list their salaries and arrangements for modifying those salaries.
- Confidentiality agreements and intellectual property agreements
The shareholders agreement can be used to outline procedures for handling confidential material or dealing with intellectual property.
- Dispute resolution rules and the voting majority required for major decisions
Having rules for handling disputes in your shareholders agreement can make the business run much more smoothly. The rules could include the voting majorities required for controversial decisions or the use of a third party to help resolve internal conflicts.
- Banking, accounting and auditing arrangements
Dealing with financial matters can often be a source of conflict in partnerships. Creating rules for banking, accounting, and auditing in the shareholder agreement helps to avoid these problems.
- Dividend policies and rules for re-investment of profits
Your shareholders agreement can have rules for dealing with profits and dividends.
- Terms for dissolving the business and for partners exiting the business
The shareholders agreement can also contain terms for dissolving the business. These terms may define who will be responsible for debts that the business has incurred or for distributing assets.
A dispute between business partners can cost the business a lot of money. The performance of your enterprise may suffer and legal action may be required if partners have a serious disagreement. Having terms for resolving conflicts in the shareholders agreement can prevent these kinds of issues occurring — saving your business money in the long run.
For more information on creating a shareholders agreement, contact us.