Have you recently started a business with someone else? If so, you should consider putting in place a shareholders’ agreement (if you have used a company structure) or a partnership agreement (if your business is structured as a partnership).
Whilst it may not seem important to have such an agreement while you are all getting along and have the same vision and responsibilities, it will become vital and you will be grateful for a written agreement entered into by the owners at the commencement of the business if things turn sour later on or something unexpected happens.
A shareholders’ agreement is different to a generic constitution of a company that is established when a company is set up. A constitution doesn’t deal with many things often covered in a shareholders’ agreement and can be amended by 75% of voting shareholders. A shareholders’ agreement usually requires unanimous agreement for any amendments.
A shareholders’ agreement or partnership agreement deals with things such as:
- How profits are applied – are profits to be set aside as working capital or shared between the owners
- Exit plans – what happens if things don’t develop as expected and the company or partnership needs to wind up or one owner leaves
- Specific rights, contributions and roles of each shareholder or partner
- When a shareholder or partner is forced to sell its shares or interest in the partnership- eg. death, insolvency, termination of employment
- The valuation method for valuing shares or a partnership interest
- Pre-emptive rights clause which gives shareholders or partners a right to maintain their proportionate shareholdings or interest (though this sometimes makes introducing new investors quickly more difficult)
- Compulsory acquisition of 100% of the shares or interest in an entity once an owner holds 90%, which makes the business more marketable (the majority can then deliver all the shares on issue to potential buyers)
- Mechanisms to facilitate resolution of disputes and failing resolution for the valuation and transfer of a party’s shares or interest to the other shareholders or partners
- Who is entitled to be a director of the company or on the board of management (the Corporations’ Act states that a majority of shareholders can appoint a director, however in a shareholders’ agreement you can state that each shareholder holding a certain percentage of shares in the company has the right to board representation and likewise in a partnership agreement you can state that each partner holding a percentage interest has the right to be appointed to the management committee)
- Incoming partners or shareholders – how are new partners or shareholders to be considered and admitted?
when a partner or shareholder can be forced to sell their interest or their shares (ie expelled from the business)
- Insurance arrangements to pay out a partner or shareholder’s estate in the event of death and buy/sell mechanisms
- A restrictive covenant for a partner or shareholder who leaves the business
- Management of the business such as who can sign cheques, when holidays can be taken, what expenses can be reimbursed and how decisions are made.
Whether your goal is to sell your business or run it for income generation purposes it is important to negotiate a shareholders’ agreement or partnership agreement early on.