Countersignature Shareholders Agreement Made Easy

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!