Are you in a business partnership which operates through a company?
If so, you need a Shareholders Agreement to regulate the conduct and expectations and rights and obligations of each of the people involved. Our prime lawyers at Pritchard Law Group can assist with this including myself.
A Shareholders Agreement is very much like a Partnership Agreement and covers the funding, structure, management and direction of the business which is conducted by the company.
What is the difference between a partnership and a company through which a number of people are working in the business?
A partnership is an association of persons who have agreed to pursue a business objective for their mutual benefit. Most people have a Partnership Agreement in place but where there is no agreement, the Partnership Act sets out default rules for the conduct of the partners. Where there is a company structure and nothing else, the operation of the company is governed by the Corporations Act and Corporations Regulations. Unfortunately, these do not really set out the rights and obligations of the parties in the operation of the business, particularly when a dispute arises as to what can or cannot be done by the shareholders and/or directors. We have been involved in the resolution of a number of disputes which have arisen, mainly because the people operating the business through the company did not have a Shareholders Agreement and did not have a clear agreement as to the rights and obligations of the parties.
A Shareholders Agreement can be reasonably straightforward or quite complex, depending on the size of the operation, the number of shareholders and directors and the long-term plans for the company and the business. Typically, we would act for one of the parties, taking instructions and preparing a draft Shareholders Agreement containing terms we believe would be appropriate and submitting that to our client for discussion between him and his partner(s). When the terms have been resolved by mutual agreement, the document would be executed by all parties and then used as the framework for the conduct of the shareholders moving forward.
Some of the points which might be covered in a Shareholders Agreement are as follows:-
- The roles to be adopted by each shareholder in the management of the company and the operation of the business activities through the company. This can cover someone who is a silent partner or has a limited role or someone who has a particular talent vitally important to the profit of the business or somebody who does the administration for the business. Where one person might put in greater hours than the other, there might be a recognition for this by them receiving a greater wage as well as a dividend.
- The dividends payable to shareholders is based solely on the shares that they hold whether it be a type of share or a number of shares. The dividend is not related to input.
- Decisions requiring a unanimous decision between the shareholders;
- Factors to be taken into account when a partner/director retires. If a person leaves the business/company there could be provisions for the remaining partner(s) to buy out their share in the company in which case the outgoing partner would leave subject to restraint provisions;
- There should be an agreement regarding what leave entitlements might be able to be accrued by the partner/shareholders. Under the corporations law there is no provision covering any kind of payment to or arrangements for directors or shareholders to receive any kind of benefit from the company except for dividends and anything else must be covered by a separate agreement;
- Restrictions on borrowings and the obligations of the partner shareholders, should a need arise for a cash injection into the company;
- Provision for overcoming deadlocks regarding key decisions of the company with provision for alternative dispute resolution processes such as mediation, arbitration or conciliation;
- Selling or winding up the business can be a problem which needs to be overcome for the long-term benefits of the parties. There needs to be a clearly defined process where one but not all of the shareholders wishes to sell their shares in the business.
In conclusion, a well thought out and well drafted Shareholders Agreement can pave the way to a good ongoing business relationship with a greatly reduced risk of difficulties between the parties involved. If you have any queries or would like to have us prepare a Shareholders Agreement or to get any legal advice, please contact Pritchard Law Group or call me, Paul Pritchard on 9543 1444.