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SHAREHOLDER AGREEMENTS

SHAREHOLDER AGREEMENTS

Many people understand the need for a prenuptial agreement when embarking on a new relationship. However, not as many people turn their minds to the need for such an agreement with their business partners. The comments made in this article relate to agreements between shareholders in a company. However, the comments apply equally to unit holders in a unit trust or partners in a partnership.

A Shareholders Agreement is necessary because company constitutions (previously known as Memorandum and Articles) do not cover many issues that relate to inter-shareholder matters. Mainly they deal with issues between the company and shareholders.

The types of issues that are commonly addressed in a shareholders agreement include the following:

It is wise to require greater then a 50% vote to decide on major issues. Without this, minor shareholders can be at a huge disadvantage. The percentage vote needed to pass such a resolution will vary depending on what percentages of issued capital are held by various shareholders. On the one hand you need to protect smaller shareholders. On the other hand you don't want to have a small minority holding everyone else to ransom. There is always a fine balance needed.

A policy is needed as to the distribution or retention of profits. Without this smaller shareholders can be "starved out". Alternatively a slight majority can starve the company of working capital.

Without a specific agreement in place there is no obligation upon a shareholder to lend money to the company. Most undocumented loans are in reality "loans at call" and repayment can be demanded at any time. Unless controlled this could easily make a company technically or actually insolvent if shareholder loans were called in on short notice.

Without any agreements in place one of two things frequently happens following the death of one of the business partners. The deceased person's family can be stuck with an investment in a company about which they know very little. Alternatively the surviving shareholders can be stuck with business partners whom they don't know, or worse still, don't like. There are a number of ways of structuring good and workable arrangements that can, but don't have to involve, insurance policies. There are some very tax effective ways of structuring these arrangements but, in the majority of cases that we see, these structures are either unenforceable or achieve less than an ideal tax result. This issue is quite complicated and careful advice needs to be obtained.

It is vital that succession planning covers the retirement of a business partner but rarely do we see this in place with the businesses that we are asked to advise upon. "Retirement" can also include one business partner just simply wishing to leave. Without proper agreements in place this can lead to bitter disputes and not infrequently the effective destruction of the business.

The questionnaire that we use in to assist in the preparation of these agreements is available free of charge from our website. The key of course, is to make sure that the agreement that you reach with your business partners is not only valid and legally binding but is also practical and workable. We find that it is difficult to reach a workable agreement when a major dispute has already arisen amongst the business partners. It is possible to retrieve these situations but not always. The lesson to be learned is don't delay.

FURTHER INFORMATION 

This Information Outline is provided courtesy of Matthews Folbigg who are experienced in this area of law. They are located at Level 7 The Barrington, 10-14 Smith Street, Parramatta NSW 2124 or call them on (02) 9635-7966 if you would like more information on this legal topic, or you wish to obtain formal advice regarding your situation.

MatthewsFolbigg is a large commercial law firm based in Parramatta, New South Wales. The firm has Accredited Specialists in Business Law, Property, Immigration, Family Law and Personal Injury. MatthewsFolbigg has specialist groups advising clients in corporate structures, intellectual property, and information technology plus franchising, estate planning and insolvency work.

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