Does your company need a shareholders agreement?

Does your company needs a shareholders Agreement?

Is there an Agreement in place?

The concept of a shareholders' agreement is similar to that of a marriage contract except it involves all the shareholders of a corporation and their relationship with the company and each other. If there is only one shareholder of the corporation, an agreement is not needed, however, if there is more than one, it is strongly recommended those shareholders develop an agreement to govern the corporation's management and administration. Having an agreement in place can help minimize disputes between shareholders and ensure all shareholders are treated in a fair and equitable manner. A shareholders' agreement is also commonly referred to as a buy-sell agreement as it usually sets out how to deal with shareholders' interests when it is time to divest of their shareholdings.

Here are some questions you may want to ask yourself:

  • If you are one of two shareholders that each own 50 per cent of a company, would you want to be in business with the surviving spouse after the other shareholder dies? 
  • When you die, how are your loved ones going to receive the benefit of what you have worked for?
  • What is to happen if one of the shareholders becomes disabled and is no longer able to be an active part of the company’s management? 
  • When the time comes that you want to retire and liquidate your shareholdings, how is this going to be facilitated? Who is going to buy your shares? The other shareholder? The company? A third party?

Therefore, the following are some of the main elements commonly addressed in a shareholders' agreement:

  • Management and administration of the company;
  • Triggering events (such as death, disability, retirement, divorce or bankruptcy) that may either permit or require the sale of shareholdings;
  • For each triggering event, the process that will be followed to effect the withdrawal of the shareholder (i.e. share purchase by other shareholders or by the company itself), the method of determining the sale price and terms of payment.
  • Company-owned life insurance is commonly used to help fund the purchase of a deceased shareholder's interest. When applicable, the agreement will provide detail as to the method by which the shares will be bought-out.

Drafting a shareholders' agreement is a dynamic process that includes honest and open discussions between all parties. These discussions are easier upfront rather than after an incident.

Any further questions? Please contact SMART Business Solutions on 0359 11 7000 or reception@smartbusinesssolutions.com.au

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