What Should Be Included in a Proper Shareholders’ Agreement

Ensuring Corporate Documents' Enforceability - What to Know

08/09/2021

The main purpose of a shareholders’ agreement is to ensure the fair treatment of each member as well as protect each of their rights and assets. This agreement is used to govern the relationship between a company, its shareholders and amongst themselves. This official and binding document determine how best they can work together, move forward in the company, and, should the time come, end their working relationship. 

It’s not legally required for a company to have a shareholders’ agreement—although it can be beneficial. No matter how big or small your company may be, this document will help you and your partner or partners make decisions on issues that may arise in the future. 

That said, what should your shareholders’ agreement include? Here are some important items that must be addressed:

Board Structure

First and foremost, the shareholders’ agreement should map out the board structure. Since it is a business contract, every shareholder must be named and identified correctly. Afterwards, the group can elect any officers for the business that they deem worthy or appropriate for the role. There should be a lead fulfilling the role of managing shareholders. This is important because shareholders have a direct impact on everything that goes on in a business.

Specific Responsibilities

Disputes and conflict can disrupt the flow of business. That is why a shareholder agreement is essential to help avoid these situations and arrive at a conclusion efficiently. So long as all the shareholders can agree with each other and work together, the business should run smoothly. 

In your agreement, specific responsibilities should be outlines. Establish rules on how officers are appointed, their roles and responsibilities, and how they are terminated. The agreement should be very specific on what actions officers or shareholders can take for the company. Accurately define expectations so that if or when an issue does come up, the agreement can guide you on the proper steps to handle the situation.

Voting Rights 

The shareholders are often made up of a diverse group of individuals, each with their own set of ideas, beliefs, and knowledge. That is why it’s important to establish a clear understanding of their voting rights. 

This includes what type of vote is required for certain decisions. For example, some decisions may only require a majority vote, but does that mean 51 per cent or 80 per cent? That is a specification that should be included in the agreement. Categorise the types of decisions the shareholders might have to face and identify the type of vote it requires to carry. 

Deadlock

A deadlock is a situation wherein the shareholders cannot come to a decision that all or a majority can agree on. When this happens, the agreement should provide instructions or specify what to do in this situation. There are plenty of methods like appointing a referee or mediator, deterrence, Russian roulette, and more. Whatever the group decides should be clearly stated in the agreement.

Working Owner Concept

These days, it’s not uncommon for shareholders to also be an employee of the company. This is the case specifically for start-ups or small to medium enterprises. In these cases, it’s important to define this person’s roles and responsibilities as a ‘working owner.’ 

Conclusion

No two businesses are alike. With the dawn of new technology and innovation, new businesses are coming and going faster than ever before. A shareholders’ agreement should be present in all companies to protect the rights and interests of all responsible parties. These agreements should be tailored to the needs and preferences of the owners. The following above are just a few examples of what the agreement should contain. 

To ensure that your shareholders’ agreement is well-drafted with all the necessary information and details unique to your business, we’re here to help you. GLG Legal is commercial and property law firm based in Brisbane. Our corporate lawyers provide you with smart, innovative, and effective solutions to your legal troubles. We are as driven and ambitious as our clients and understand the need to improve better than anyone. 

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