A Shareholder Agreement is a document which governs the conduct, rights and responsibilities of shareholders and directors of a company. If your business operates from a unit trust, a Unit Holder Agreement works in a similar way.
An agreement of this nature is akin to a pre-nuptial agreement for your business. If all goes well you’ll never need to take it out of the file, however if matters turn south, it’s going to be one of the first documents you’ll turn to. If you have pre-agreed rules and procedures documented that deal with the basis someone can enter or exit the business and how equity is to be valued and transferred, you will be able to better manage a smooth transition and maintain the stability of the business and the confidence of staff and key stakeholders.
In the context of a family owned business, Shareholder Agreements (and unit holder agreements where the business or family assets are owned by a unit trust) can also provide certainty around issues in relation to succession of directors on the board, ensuring successive family representation on the board and ensuring mechanisms are in place to preserve the business, its assets and the integrity of the company’s decision making processes.
When thinking about preparing a Shareholder Agreement, there are many issues to consider, including but not limited to the following:
Directors & Shareholders
- Who can appointed to the Board.
- How directors are appointed and removed.
- How decisions are made by the directors and shareholders.
- Quorum and voting requirements of directors and shareholders.
- Who will be the shareholders and what rights attach to those shares.
- Who is getting how much of the profit in any given year.
Exit and Termination
- How people leave, or alternatively how they can be shown the door.
- What the triggers for the involuntary exit of a shareholder or the termination of the office of a director will be.
Transfer of Shares
- What happens to an exiting shareholder’s shares and how they are valued.
- What happens if a director dies, falls ill or becomes incapacitated.
- Making sure you’re not suddenly running a business with a former director’s spouse, unless you want to!
- Funding the purchase of an exiting shareholder’s shares; insurance requirements and Buy/Sell arrangements.
When seeking advice in relation to the preparation of a Shareholder Agreement, it is vitally important that it is prepared strategically in the context of your long term plan or intentions for the business so that it can actually work the way you need it to. We recommend against using ‘boiler plate’ or standard template documents as they will not be drafted to fit your business.
We make sure that your Agreement is tailored to addresses appropriate governance mechanisms within the company to ensure that the decision making around the operation of the business, its profits and assets are dealt with in the context of what your business needs. We will work collaboratively with your accountant and tax advisers to make sure your advisory team is on same page and your business is protected to the maximum extent possible.
Being prepared for the exit of a shareholder or unit holder will save you lots of time, money and stress when the time comes for you to part ways with your business partner. Preparing a Shareholder Agreement before you need one is the key to providing all stakeholders with certainty and ensuring minimal disruption to your business during what can be difficult times in your business.
Please contact us to find out more about how we can assist you with the preparation of an effective Shareholder or Unit Holder Agreement.