E signature shareholders agreement
Hello everyone! Today we are going to
talk about How to draft a Shareholders Agreement?
Shareholders agreements only apply to companies with more than one
shareholder. So if you have a company that has two or more shareholders you
should look at putting in place a shareholders
agreement. So what is a shareholders agreement? Well
as this slide says it's a contract between the shareholders
that sets out the rights and responsibilities
of the shareholders. Generally a shareholders agreement
can cover things like, How many shares do each shareholder? or
Does each shareholder own. It could set out whether there are
different classes of shares and if so the rights and responsibilities that are
applicable to each different share class. Often though the
constitution can also set out the share class information, so that's not
necessarily in a shareholders agreement but can be in there.
A shareholders agreement can set out whether or not the company is able
to issue additional shares in the future. And if so whether current or existing
shareholders could have their shares diluted or
whether they could buy more shares to keep their share
percentage. A shareholders agreement could also set
out How new shareholders may join the
company? How existing shareholders can leave the
company? Whether a shareholder could ever be forced out of a company
and what happens if a shareholder was to die?
Unfortunate as it may be. And some shareholders agreement even have things
like drag and tag along rights. Which are rights that are applicable to
sale. And I'll talk more about those a bit later. So what are the advantages of a
shareholders agreement? Well the main main advantage is that it sets out the
rights and responsibilities between shareholders. So it is a contract that is
formed between the shareholders and because it's a
contract and binding it compels those shareholders to do or
not to do certain things in accordance with the terms of the shareholders
agreement. So because of that shareholders
agreements can be instrumental in preventing disputes, and it also they also can be helpful
because they can clearly set out the roles and responsibilities that each
shareholder is meant to have under the company. That's
just a couple of the advantages. I mentioned a few of them earlier which is
that they can also set out things like you know how to sell shares, how to join
the company. Whether your current shares can be
diluted. Whether if you sell your shares you have
a restraint and whether you are not allowed to
enter into or buy shares in a company that competes
with the company that the shareholder is currently a shareholder of.
So there's a whole lot of things that can be in that shareholders agreement.
And that's why -Are they required at law? No Should you have one? Definitely and you should definitely have one where there
are shareholders who don't have competing interests, sorry
where shareholders could have competing interests that's when you definitely
want one and when you think about it even if you
have a company with family members whilst your interests may
be aligned today that does not guarantee or
necessarily mean that your interests will be aligned in the
future and so just to avoid disputes it's much easier when things are going
well at the start to put in place a shareholders agreement.
Which will then govern the relationship between the shareholders so that if and
when things do go sour in the future at least you've already, you
pre-agreed the terms as to what's going to happen in the event of dispute or if
one party wants to leave or sell their shares
and so that way you can avoid a whole lot of heartache. and that's what this slide is getting at
there is generally going to be some sort of disagreement
between the shareholders and if you have a shareholders agreement
you substantially you can substantially reduce
the risk of things going south because the shareholders agreement should
deal with the scenario that is the subject of the dispute. As another example you may have someone
who has been promised that if they work in
the company for a certain period of time that they're going to be given shares.
If that's the case you can have all that in the share holders agreement
you can have what's called a share vesting regime. So
on the completion of a certain number of months or years of work
that they are vested or granted certain shares in the company. You can deal with
what happens if a shareholder passes away.
What's the process there? You might be the majority shareholder of
the company and you may want to sell your shares but you might discover that
you can't actually sell your shares because the minority
shareholders are able to vote against you and hold you to ransom. You may have a shareholder who's
also an employee and they may be performing services for
the company and you just need to make it clear. Not
so much about their salary or payment because that'll be
covered in the employment agreement but you could
clearly specify in the shareholders agreement if and when they are to be
granted shares in the company i.e. do they have
to meet milestones, are the milestones deliverable based or
are they based on just the passage of time? So basically
you can set out whatever you need to in the shareholders agreement that is going
to be relevant for the circumstances of your company
and what your shareholders are doing. I just thought I would mention
alternative forms of agreement because often we get phone calls with
people saying, they wouldn't want to put in place a partnership
agreement. When in fact when you dig behind the
scenes they're not actually a partnership they're a company.
Or you get the opposite someone's saying I want to put in place a shareholders
agreement when in fact they are a formal partnership.
So partnerships are different when you form a company. A company is
a separate and distinct legal entity a partnership
is not a partnership is created by a partnership agreement
where all individual partners are legal entities and they're usually just
people and all those individual people collectively
form the partnership. So we're not talking about partnerships
and as I mentioned main difference between them is a partnership obviously
applies to partnerships whereas a shareholders agreement only applies to a
company. So if you have any doubts as to what
sort of entity you are, you can go to ABN lookup and you
can lookup your structure by putting in your ABN
and it will tell you what type of structure
you are. So now we have some more confusing
subjects which are sorry which is Shareholders Agreement Articles of
Association Corporate Bylaws and Company
Constitution and Replaceable Rules. These are all
terms that are used when it comes to companies and what do they all mean.
Well as we mentioned a shareholders agreement it's the contract
between people who own shares in the company
that sets out the rights and responsibilities of those people.
The Articles of Association that were used by companies prior to 1998. So you
probably don't have to worry about those too much. Some companies are not actually owned by
shareholders. For instance companies limited by guarantee
these are often companies that are formed to create charities.
Where you have a company limited by guarantee it does not actually have
shareholders it has members and so where you have
members you will have or you could put in place corporate bylaws
to govern the relationship of those members. Now,
when you form a company in Australia if you use one of the online
company formation websites which is always a good thing to do because they
provide a good service and they're pretty cheap
and there's plenty of them around if you just search on Google
You'll usually be issued with a in fact you will always be issued with a company
constitution. So the company constitution
sets out the overriding governance of the company
and it'll have things in there like What classes of shares
are there? What preference shares are there?
What preference or voting rights, attached to the various
share classes because you can get quite creative and have things like a
class shares B, class share C. Class shares the people
who own a class shares may have 10 votes for each share. Whereas A class shareholder may only have one vote
per share and so that is a way you can control who
actually runs and operates the business because in that example
you'd make sure that the person who has the or the people that have the A class
shares have the ability to sway the votes just
by numbers. If you don't have a constitution if you
don't get one when you purchase your company
or you just set it up yourself by registering it with ASIC.
Then you'll get you'll be covered by the replaceable rules. These replaceable rules are rules that
are set out in the Corporation's Act and they will apply automatically.
If you don't have a constitution and even if you do have a constitution
often the constitution just mirrors what's in the
corporation's act replaceable rules but not always. Okay, let's get into some juicy stuff so
can a shareholders agreement be verbal? Well Yes all contracts in
Australia can be verbal. Do you want a contract to
be verbal? No You do not. Why? Because if you have a
verbal contract and there's a dispute. How can you prove what the terms of the
contract were? You simply can't. Right so,
whilst legally you can have a verbal contract you should not do that
and you should definitely not do it for shareholders agreements,
because once a dispute arises how will you prove
your position or your belief as to what was agreed is the correct one.
That can be real pain in the bum and you may have to look at things like
you know written correspondence between the parties i.e. emails,
letters anything like that, and it can be very difficult and
in fact you may not be able to prove what you believe was agreed.
But with the shareholders agreement you can clearly set out what is agreed and
there is no doubt. So that is the reason why you want a
written shareholders agreement. Are you stuck with a shareholders
agreement forever and a day? If you sign one the answer obviously is
No. Any contract you have anywhere can be varied. It just requires
the consent of the party and most contracts will actually have a
variation process. That basically says all parties to the contract need to
consent and their consent needs to be in writing.
So what most people do is just do a deed of variation that amends the relevant
contract. Or you can simply agree. You can
to it's going to say you can agree to revoke the current shareholders
agreement and issue say Version 2 and so then in Version 2 you just reflect the fact that the parties have agreed
to terminate the first shareholders
agreement and then proceed with shareholder agreement 2 So it's not a big deal if you know what you're doing
and you've just got to make sure you do it right. But the key principle there is
you can vary an agreement in writing signed by all parties to that agreement. Right, the juiciest stuff. What clauses
should be in a Shareholders Agreement? Well there's a whole lot of stuff you
can put in here. For instance, you should start off with, What are the objectives of the companies sorry of the
company? And what I mean by that is what is the
company looking to achieve? What are the business activities?
You can set out share classes and voting rights but as I mentioned
earlier, sometimes the share classes and voting rights
are set out in the constitution but just understand
the constitution may say things like there are
five classes of shares A B C D E class A is 10
votes per share, class B has five votes per share,
class C has three votes per share, class D two votes
per share and class E one vote per share. That's usually as far as the
constitution would go. It would just set out that there are
different shares and each shares class has a different
set of voting rights that attach to them.
It would be actually in the Shareholders Agreement where you would specify,
"Joe Blow owns if I can speak properly Joe Blow owns 100 A class shares,
John Citizen owns 50 C class shares and Simon Smith owns 25 E class
shares. Does that make sense? So the constitution
just sets out the general overriding principles as to what sort of
classes and types of shares there are but it'll
actually be in the shareholders agreement where it will specify who owns
which or how many of which type of share class. You can have other
things you can have shareholders loans. Whether interest is payable on
those loans. You should have things like a dividend
distribution policy in the shareholders agreement
i.e. will the company always distribute dividends or profits made by
the company. You need mundane things like how often
are they board meetings? How many directors are required to form
a quorum? So that decisions can be made at that
board meeting. How is or how are new shares issued?
Is there any likelihood of capital calls? What happens when a party wants to sell
or transfer their shares? Do they have to offer their shares
to other existing shareholders before they sell? or Can they
sell directly to a third party? And if they can
sell directly to a third party. Do the remaining shareholders
have to or can they agree as to whether they'll accept
the new third party coming into the company?
You can have other things like will there be drag along or tag-along rights.
So drag along right side if you've got a majority shareholder who
is willing to sell their shares to a third party.
The smaller or minority shareholders can be dragged along and be compelled
to sell their shares and that way the majority shareholder is able to
force a sale of the company to another entity. Tag-along is the
opposite which is say the majority shareholder wants to sell
the smaller shareholders can tag along
and as in jump on board with the majority shareholder and
sell their shares that way. What happens if a party or a shareholder
experiences divorce or they become incapacitated? or In fact what happens if
they were to die? Are their shares dealt with by way of
their estate? or Does the Shareholders agreement deal
with them? If you are a shareholder and you want to
sell your shares. What is the price that you can sell your
shares for? Does the Shareholders agreement set
out a valuation process? Some shareholders agreements do, they
will say "okay if you want to sell your shares
you've got to offer your shares to the other remaining shareholders
and the value or price that will be paid for the shares will be determined by
this formula, or by an independent third party such as
an accountant who's come in and their job is to value the shares. So, as you can see there are a whole lot
of different things that can be in the Shareholders
Agreement. You may you'll definitely want confidentiality provisions. You could
have non-compete clauses. Which basically
means if you are a shareholder and if you sell your shares are you
stopped from earning shares in a competing
company i.e. a company that competes with your old company.
What are the events of default? What happens if there's a dispute? How is
that resolved? Does the dispute go to
arbitration? Where an arbitrary or an arbiter or a mediator makes a
determination? and then How does the agreement
terminate? and What is all the governing law of the agreement?
Even though that's generally just going to be Australian law. Okay so as I said the constitution will
set out different classes of shares but the shareholders agreement can set
out more or additional information into share
classes and voting rights.
Also shareholders can agree on the names for the share classes. For example
I've used a class B class C class but shareholders could agree to
call the share classes things like ordinary
shares, non-voting shares, preference shares or
they could say first-class shares, second class shares, third class shares. You can have preference shares as I said
can have a preference to them they could have a preference for dividends so
only people who own preference shares or class A shares have the right to receive
a dividend. Which basically leads to the point which
is you can you can set up shareholders agreements
such that you can exploit. It's a harsh word but you can
potentially exploit your position if you're the
majority shareholder because you could have
you could be the only party that has class A shares
and those class A shares are the you know have
10 votes per share or 100 votes per share
and class A shareholders are the only shareholders
designed to receive any sort of dividend.
So it's when you understand these sorts of things and how
shareholders agreements can really protect one party and potentially
exploit others or not so much exploit but
just not be as advantageous to others. Once you understand things like that
then you get a bit circumspect when you
know clients come to you and say "oh look I work in this business and
they've offered to let me buy into the business.
So I'm not going to get a pay rise this year but you know I'm going to
spend 10 thousand and I'm going to own 10 of the entire business."
So that all sounds well and good in principle until you understand that,
"well that's great so now you own 10% of the company but if you own 10% of the
company and the 10% you own is in share
classes. Where you actually don't have a right to receive
dividends or you don't have the right to vote.
Then really you've got nothing. So this is why for me it's very important
if you're looking to buy into a business you
actually really understand what you're buying.
As in what type of shares and what are the rights that attach to those shares
and then there'll be other clauses in the shareholders agreement like
What happens if the company wants to agree to pay third parties or enter into
loans? Can that be done by just the majority shareholder? or
Does the consent of all shareholders need
to be required or compelled? So you just you really need to understand all of
that and how it works so that you can understand that if you were buying into
a business. How can you be taken for a ride?
Harsh words but you understand what I'm getting at or
not, or actually whether you'll be fine. Okay let's keep moving. So Sweat Equity is a great one with
Shareholders agreement in terms of you may have employees who you pay them as
an employee under an employment agreement.
But you may say to them, "Look if you hit certain milestones or if you provide
employment services to the company for a period of time.
Then we will then gift or grant you shares in the company.
and so that's as I mentioned a share vesting type regime. Where the shares
will vest in that employee at certain points in
time or once certain milestones are met and that can all be set out in the
shareholders agreement. This is just a follow-on from that slide
which basically says you can have shareholders who are also
employees, there's no issue with that. The question then becomes how are they
getting paid are they getting paid through the vesting or granting of
shares or are actually being paid as an employee or
are they getting both? Next adding or removing shareholders.
Okay so the Shareholders agreement should
set out the process for adding or removing shareholders.
So it will say things like Where a shareholder wants to sell?
What is the process? and it should also say What is the process
where a new person or investor wants to come in
to the shareholders agreement? You always want the incoming person
whether they're an investor or just a new standard shareholder.
You always want the new incoming person to be bound by the existing
Shareholders agreement. And that is easily done by having them sign what's
called the Deed of a Session. So every shareholders agreement usually
I said every but 95% of them have in
a schedule or an election at the end of the Shareholders Agreement.
They will have what's called a Deed of a Session. So
that is the document that an incoming party signs.
And by signing the deed of a session that is their way of saying that
they agree to be bound by the terms and conditions of the shareholders agreement.
So if you ever see a deed of a session on a shareholders agreement that is what
that is for and you should always use them.
Otherwise the new incoming person will not be bound by the Shareholders
agreement. Yet all the other pre-existing shareholders will be and
that is a position you do not want to be in. So can you avoid being diluted? So let's
say a new investor comes in, they tip in some money into the business.
Will that dilute your shares? And the answer is -it could.
Depending on what is said in the Shareholders Agreement because you might
have the right to match the investors
investment. But in saying that you still need to front up the money
or put up the money to be able to buy more shares and if you can't do that
then sure your shares may be diluted but as I said the Shareholders agreement
should set all of that out. Do you have share restrictions? Yes. You should! In other words generally most
shareholders agreements obligate a selling shareholder to offer
their shares to the remaining shareholders
before they try and sell them to someone or a third party.
The other thing too is that often a person will not be able to sell their
shares if they don't receive the consent of the
directors. That is not as common usually
if a selling or a party wants to sell their shares they are able to do so they
generally don't need the consent of the directors
but what they do have to do is offer the shares
for sale to the other existing shareholders. And most
shareholders agreements will say that the selling shareholder offers
their shares to all remaining shareholders and if any of the
remaining shareholders do not want to buy the shares that have
been offered to them then the other remaining shareholders
who do want to buy the shares actually have the ability to purchase
the additional shares that would have been allocated to the
remaining shareholder that said No. I hope that makes sense. So if you've got
a person selling 20% of the company to five
people so there's six people in the company but this one shareholder has 20% they then offer their 20% to the other
remaining five which means each each party would get four shares if
there were 100 shares. So if one of those shareholders who's
been offered the four shares decides not to buy
the shares. Then their four shares are usually offered equally,
to in this case the other remaining shareholders who do want to buy.
So let's say of the five, four one to buy the fifth doesn't, then the fifth
person's shares in this case which are four shares gets offered to the other
four shareholders which are one share each. So then those remaining
four would then have the ability to buy five
shares. I hope that example was clear as much
because I think she was pretty hard to work out. Okay
what a buy-sell provisions so buy sell provisions set out house shares
may be bought or sold. Now as I have mentioned before don't confuse this with a Buy Sell
agreement. So a Buy Sell agreement will be triggered.
It's a different document and it triggers when certain events happen
between usually partners but buy sell provisions
in the shareholders agreement adjust the clauses that deal with the actual
purchase or sale of shares and what happens if a shareholder
becomes insolvent disabled they retire do any of those
events trigger the disposal of the shares the
shareholders agreement should set all of that out. If someone wants to retire what happens
well once again no surprise here if you've been paying attention this
will all be set out in the shareholders agreement and what I
should also specify is that there is no right or wrong to
any of this in terms of there are processes and procedures that
are more common and fairer than others but there is no
right or wrong and you can actually have anything you
like. As long as it's not illegal but anything
you like in your Shareholders Agreement. So what happens if a shareholder dies?
Well this can actually be quite complex because if it's not dealt
with in the Shareholders Agreement. Then the shares will then form an asset of
that deceased person's estate and the shares
will pass in accordance with their will and so what that could mean
is that the remaining shareholders in the company
are actually then in business with the new
incoming recipient from the deceased estates will.
Makes sense, so one of the shareholders dies
leaves all the shares to their daughter the daughter
would now be a shareholder in the company
and as I mentioned before not necessarily obligated to the
shareholders agreement you'd have to check that
because they really should sign a deed of a session
but that as i said may not be the case because it can all be specified in the
applicable shareholders agreement. Shareholder disputes
These are common and that's why it's really good to have a shareholders
agreement because if there is a shareholders agreement it will just it
will describe what you are to do in the event of dispute.
Is a shareholders agreement legally binding? Well the answer is -Yes it is a
contract. So as long as you satisfy the standard and basic
requirements of contract law offer, acceptance, consideration all those
sorts of things and the document is appropriately signed. Then -Yes it will be
binding and it will be binding on all
shareholders who sign the Shareholders Agreement. So don't forget that point is that it
must be signed initially by all shareholders who you want to bind to the
agreement and for new incoming people they are
bound by the shareholders agreement by signing that deed of a session.
So if it's breached this should be set out. So if one of the shareholders
breaches the agreement, for instance, they don't pay money
when they're meant to. Then this should be set out in the
shareholders agreement as to what is to happen to them.
Generally you can do things like, withhold their ability to vote.
As in nullify their voting rights until such time as
the breach is rectified. If there's a dispute or a
disagreement then as I said before the Shareholders Agreement should specify
how that is to be dealt with. Can a shareholder be forced out?
It is possible for example if new shares are issued which dilute the interest of
an existing shareholder then that shareholder may find that they
actually have or no longer have the voting power they
once had and then on that basis the new
sharehold not the new but the shareholders who now have increased
voting rights could pass a resolution to force that
shareholder out of the company and compel the sale of their shares but
that is a drastic or a random
type. Example and a well-drafted Shareholders Agreement can
protect against that. So while it sounds like a scary thing to
happen. Generally it can't happen in most standards Shareholder Agreement
templates you see. Yes they can. There are certain
requirements that you have to notify all directors about directors meetings but
shareholders meetings can be held in secret but what you need to
understand is that while they can meet in secret
for a meeting of shareholders to be valid under the Corporations Act
then notice that the meeting must go out to all
shareholders and if that meeting notice is not
given to all shareholders then the meeting is not a valid meeting for the
purposes of transacting certain matters under the act or under
the Shareholders Agreement. Okay moving right along. How can
shareholders agreements be terminated? Well with any contract if you have the
agreement of the parties in this case if you have the agreement of the other
shareholders then it can be terminated. They automatically terminate generally
if the company well actually they do terminate
if the company is wound up because there is no company
left to be a shareholder of. Generally the Shareholders Agreement
will say that the agreement itself terminates if all shares are transferred
to a single shareholder. Which makes sense theoretically because
shareholders agreements are only relevant for
two or more parties and if there's only one person owning all the shares then
there is no reason for a shareholders agreement.
Often the shareholders agreement will say if you have an IPO or go
public you that will terminate the Shareholders Agreement. And that has been a guide to
Shareholders Agreements I hope you found that useful as you can
see there is a fair bit of information or knowledge required
with Shareholders Agreements and if you do want to do it yourself
that's fine just go and buy a decent template
somewhere. There are pretty some good sites around on the internet. But just bear in mind that they are a
bit more complex than normal and there can be issues that arise. Anyway I
hope you have found that helpful. Thanks very much!
