Shareholders Agreement A shareholder agreement can play a vital role in any business. It should confirm how you and your business partners want to own and run your business. A simple idea that is often overlooked by business owners particularly at the start up stage. A shareholder agreement deals with fundamental issues that relate to long term business success, this includes: decision making, management, division of profits, succession planning and the valuation of shares.  Importantly, it can assist in avoiding future disagreements, that, if left unresolved, could use up valuable time, money and resources and lead to business failure.   What is a shareholder agreement? This is often the very first question that our clients ask us. A shareholder agreement is a generic term used to describe an agreement or contract between the shareholders (or owners) of a business venture.   In all cases, a shareholder agreement needs to be tailored to suit the particular business structure that is used, whether it is a company, unit trust, partnership of trusts or individuals.    As you can imagine, a shareholder agreement can be quite complex as it needs to accommodate the collective intentions and individual circumstances of all the shareholders.   Why use a shareholder agreement? Some of the benefits of a shareholder agreement are that:   the business partners are able to record exactly how they want the business to operate. It is a useful tool in evaluating the compatibility of everybody’s  goals, objectives and capabilities;   it normally remains private and confidential between the parties. It does not need to be made  public, unlike the company constitution which may need to be notified to various pubilc authorities;   it is relatively easy and cheap to modify or amend. This can be important for changing circumstances of the business and for tax planning purposes;   it can help owners plan for retirement and exit from the business and ensure a smooth transition;   it can assist in raising finance from banks or creditors;   it can ensure shareholders are able to afford to purchase the stakes of co-owners in the event of death or disability, by funding such a sale through linked life and trauma insurance; and   it can reduce the cost and uncertainty surrounding a business break up   Some of the key items of a shareholder agreement are discussed in more detail below:   1. Distribution of business profits It is the intention of most businesses to make profits for the benefit of those who have invested their money, time, effort and/or skill into the venture.  This intention is usually embodied in some form of business plan.   The question is when should the investors/shareholders begin to realise a return on their investment? Who and how much closely follow! What if things go better then expected (or worse)? Should individuals be rewarded for extraordinary efforts or talent?   A shareholder agreement provides the parties with the opportunity to clearly state how the profits of the venture are to be utilised and provide the scope for review in changing circumstances.   2. Goodwill protection  A shareholder agreement should contain clauses that require all parties to maintain confidentiality and not release company information to outsiders or competitors. This is particularly important if one, some or all of the parties are involved in a number of business ventures or where some parties are more involved in the company’s day to day operations.   It is also possible to limit or restrain the ability of existing or exiting shareholders from competing with the company for a particular period of time and within a particular geographical area.     3. Death, incapacity and sell outs Parties need to acknowledge that business and personal circumstances will and often do change. A shareholder agreement needs to be accommodating of the fact that shareholders may want to cash in on their investment and make provision for death or incapacity.   This can often be a particularly traumatic period on many levels for both the business and individuals involved. This can be magnified by uncertainty, differences of opinion and lack of understanding (particularly by the estate of the deceased).  It is often the case that ongoing business owners are forced to deal with other people (such as family members or spouses) who have no interest, desire or knowledge on how to run the business.   To provide for a smooth transition, a shareholder agreement should include: ·    A method for valuing the shares of the business. For example, through appointing experts or by the parties agreeing to the value to be used in such circumstances on a yearly basis; ·     Who will have the first right to buy the shares; ·     How this will effect the control of the company; and ·   How to finance a buy out of the shares. For example, by a deferral of profit sharing, loan, or in the case of death/incapacity require each owner to take out life and trauma insurance to the benefit of other shareholders.   4. Control and Governance The rights and obligations of the parties can come from various sources depending on the type of structure and the content of the documents used to create the business venture.   For example, unless modified by the parties involved, a company is automatically assigned a standard constitution under the Corporations Act 2001. The constitution details how, who and when key decisions can be made and usually favours the majority or major shareholding party or parties.  This is often to the detriment of minority shareholders and can often lead to a dispute or stalemate where there are a number of parties involved.   A shareholder agreement should work hand in hand with the company constitution or document that created the business structure. It should enable the parties to flesh out and document: ·    Who the shareholders are; ·    How much control to assign to each shareholder; ·   Who the directors are and who has the power to appoint and/or fire a director. For example, will there be a rotation policy, selection and/or performance criteria?; ·    The roles, rights and obligations that are attached to the shareholding; ·    The process for making decisions; and ·  What decisions can be made, by whom and who should have the deciding vote in case of a dead lock.   How a Shareholders Agreement can help? We have detailed a number of issues that can be covered in a shareholder agreement. A shareholder agreement may not need to be lengthy or complex. It really is up to you and your business partners the extent to which you want to document how your business relationship will operate. Simply going through the process of asking yourselves and each other important questions about the business and its future can help to facilitate better understanding amongst the parties that can be cemented into an agreement. The alternative could be a frustrating, time consuming and costly process that leads to the disintegration and failure of an otherwise viable and profitable business.   If you would like to discuss any of the issues raised in this brochure, or would like us to prepare a shareholders agreement for you, please feel free to contact our Rex Afrasiabi on 1300 88 73 91 or rex@malegal.com.au