Are you currently a shareholder in a business?

YOU NEED A SHAREHOLDER AGREEMENT!

Business arrangements can look very different for everyone. Whether you are in a start-up with your best friend or a part of a family business that has been trading for multiple generations, if you are ‘in business’ with other people, you need to document your obligations and rights in a formal agreement. 

No matter what the structure is, it can be easy to think that your ‘mutual understanding’, ‘lifelong friendship’ or ‘family relationship’ with your fellow shareholders or your Company Constitution will be sufficient when it comes to a dispute within, or sale of, the business.

Despite your best intentions, things may not go to plan and if you are not properly prepared when things are going well, it is likely things may end bad when it is not going well.

We regularly meet devastated business owners who did not anticipate the importance of documenting their relationship with the people they are doing business with. 

Small Cost Now vs Big Cost Later

A Shareholder Agreement may not seem necessary when you start your business, however, it is easier to negotiate when everyone is excited about the business and in a clear head space, rather than when everyone is focused on their own interests with emotions running high.

For example:

Tim and Robin are brothers who established a company to operate their new business. Both Tim and Robin invested a substantial amount of capital (their own money) into the business and did not want to spend additional funds on a Shareholder Agreement. They were confident in their ability to navigate the ups and downs of the business together.

Within the first year, Robin wanted to leave the business and pursue new ventures on his own. As Tim and Robin were equal shareholders of the business and did not have an agreement in place governing their relationship, their negotiations to finalise the valuation and transfer of the business was unnecessarily drawn out.

This not only incurred considerable legal fees but was emotionally draining and stagnated the growth of the business.

Why you need one

Despite your Company Constitution being filled with information about administration matters, it is unlikely that your Constitution outlines the rights and obligations of the shareholders (particularly in the event of a dispute).

Unlike a Constitution, a Shareholder Agreement is not compulsory, however, a Shareholder Agreement is a powerful document and is particularly important if you and the other shareholders or directors are family members or close friends.

Simply put, a Shareholder Agreement is an agreement between the shareholders of a company. It sets out each shareholder’s rights and obligations.

A Shareholder Agreement would have defined Robin’s obligations to the business and would have set out how a valuation of the business and transfer of Robin’s shares should be finalised. A Shareholder Agreement would have effectively provided a ‘how-to guide’ in order to resolve any issues quickly and with finality.

Why Call Us?

At Brandon & Gullo Lawyers, we understand that your needs of your business are unique. There is no ‘standard’ Shareholder Agreement and it should reflect your particular circumstances to ensure it is effective.

We love working with small to medium businesses and take the time to understand your business and your working relationships. We prepare Shareholder Agreements that are customised to your needs.

 

For more information on the roll of a company shareholder, you can visit ASIC’s page here.

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Disclaimer
This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.