Starting up a business can be challenging. While it is important to try to get the business up and running as soon as possible, a lot of entrepreneurs fall into the trap of not paying attention to matters that, if left unattended, may cause problems in the future. An example of these sorts of matters is matters that involve legal documentation, such as confidentiality and non-disclosure agreements, terms of trade, and partnership or shareholder’s agreements.
The information in this article is for general purposes only and should not be relied on as specific legal advice. Should you have any particular questions please contact your solicitor or contact the author directly.
One of the commonly missed steps in setting up a business is a shareholder’s or partnership agreement. This is used in a situation where there are two or more entrepreneurs working together in a business. Whichever agreement is used depends on the structure of the business, however the best time to prepare the agreement is right at the start of the business, before any disputes arise between the parties.
One of the matters that a shareholder’s agreement deals with is in regard to exiting the business. This may happen due to retirement, disability or even death. In the instance of a shareholder retiring, the shareholder’s agreement may give the other shareholders the option or first right to purchase the shares.
In the instance where a shareholder has passed away, the shares may be of little value to any other party other than the other shareholders. This can result in the shares being sold to other parties at a fraction of what they may be worth. In such a circumstance the shareholders agreement may specify that the other shareholders must compulsorily purchase the shares.
[Shareholders or Partnership Agreements? Continued]
As many of the matters that a shareholder’s agreement covers is typically not covered by the company’s constitution, a shareholder’s agreement operates as a supplement to the company constitution. An ideal agreement deals with issues that have a distinct possibility of arising during the life of a business. It can also provide for a mechanism which resolves those same issues without the need of court intervention.
A shareholder’s agreement can include provisions regarding:
- Direction and type of business undertaken
- Meeting Procedures
- Policies, Management, and Structure
- Procedures of appointment of directors or executives
- Voting rights and what decisions require votes
- What decisions are considered major decisions and what percentage of votes are required to pass these decisions
- The rights of minority voters
- Breaking deadlocks
- Shareholder’s exit strategies (including what happens if a shareholder passes away)
- Shareholder’s warranties
- Confidentiality agreements
- Restraint of trade
- Dispute Resolution
In summary, a shareholder’s agreement can deal with a wide variety of matters that may arise in the life of a business. The failure to address these issues can lead to expensive litigation or even to the failure of the business itself. It is therefore very important to have these matters dealt with early. Don’t leave these matters to chance or ignore it just because there are no problems at this point in time. You never know what is around the corner.
About the author
Kenneth Ti is an Associate Solicitor with Phang Legal and a graduate from the University of New South Wales. He has a background in financial services and insurance and has interest in a wide range of legal areas including Commercial and Civil matters and Intellectual Property. Kenneth is a strong believer in community services and pro bono work.
About Phang Legal
Phang Legal is a progressive and dynamic law firm offering a different attitude to the practice of law and a different approach to the delivery of legal services. The firm continues to honour the traditions and standards of the legal profession, while remaining current and relevant to ever changing client requirements and expectations. Phang Legal provides cost effective and practical solutions across a wide range of practice areas including conveyancing and property law, corporate and commercial law, litigation and dispute resolution, wills and estates (elders law), legal aid and criminal law, and notary public services.
