They say nowadays that a third of marriages fail, and for businesses, that rate is even higher. So consider a shareholder agreement a pre-nup for your business’s marriage to investors and shareholders. A way to ensure that you won’t lose your hat in the separation and that performance expectations are set for the relationship.
If you are registering your businesses as a company in Australia, you will have to have a shareholder’s agreement of some form. There are templates and examples you can follow, but at the end of the day a shareholders agreement is as unique as each business and you will need to make your own decisions on how much power shareholder have, how management will be run and how profits will be divided. This is a legal document, so it’s not to be handled lightly and can become extremely important in some of your company’s most important dealings such as exits and capital raising. Below, we’ll provide some basic tips and some links to templates you can learn from as your draft your own agreement.
First, some of the things your shareholders agreement needs to address….
- The structure of the senior executive team and how they will run
- Voting rights of shareholders and directors
- Majority/percentage votes required for major decisions to be implemented
- The type of decisions that require a vote between shareholders
Common voting issues include the sale of the business, bringing in new shareholders and the hiring or firing of senior executives or directors.
- What happens on a deadlock vote and how it should be resolved
- Banking, accounting and auditing arrangements
- Dividend policies for the distribution or retention of profits
Set out how often dividends will be paid and how their value will be determined (e.g., as a percentage of net profits). The agreement should say when they are not to be paid – such as when working capital is required and liquidity ratios have fallen below a threshold.
- Capital contributions and what assets are provided by each participant
- Shareholder obligations to provide “loans” to the business
- The type of business that will be undertaken and the planned future direction of the business
- Parties salaries and reviews including fringe benefits
- What happens when a party wants to exit or passes away
Setting out formal processes that govern how shareholders can exit the business and at what price, can remove a major source of contention in private company ownership. The sale process should give existing shareholders preemptive rights to purchase the stake before it can be sold to an outsider using the valuation method set out in the agreement.
- How shares will be valued in the event of a buy-out or sale
Much like developing a business plan, it can really help to look at the documents of those that have come before you, but i shouldn’t be a direct cut and paste because the life cycle, team and funds of each company are entirely different. Here are some example business plans from Australia to consider:
• This detailed sample from the Cunich Business Lawyers gives not only a fill-in-the-blank example of a shareholders agreement, but notations along the side that flesh out what your options are and what you should consider
• This checklist from Tresscox Partners gives a lawyers-eye view of a shareholders agreements and allows you to get a brief overview of some of the considerations they are making in the process as they draft an agreement with a business.
• A real example of a shareholders agreement for Australian company Corrections Company of Australia
• A discussion on Silicon Beach concerning shareholder agreements and costs
Although our info is researched, we aren’t lawyers so check yourself before you wreck yourself and get some professional law consultation if you have any questions.