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Shareholder Agreements:  when does a company need a Shareholders Agreement?

If you have decided to start a company (or you are currently operating a company) then it is imperative to address how the operation and internal governance of the company is to be conducted. 

This can be done via one or more ways including by use of:-

  • the replaceable rules, found in the Corporations Act;
  • a Constitution; and/or
  • a Shareholders Agreement.

 

Replaceable rules

These are standard rules about how a company is to be managed.  They are contained in the Corporations Act 2001.

A company may choose to rely on the standard replaceable rules in place of a formal Constitution.

Constitution

A company may institute their own specific internal governing rules by way of a Constitution, rather than rely on the replaceable rules. 

A company may, by provision of its Constitution, displace or modify a replaceable rule that applies to it or alternatively, may include in its constitution a replaceable rule that may not otherwise apply.

Shareholders Agreement

In many ways, a Shareholder Agreement is similar in content and purpose, to a Constitution.  The main difference between the two is the manner in which they are entered into, and the ways in which they can be amended.

A Shareholders Agreement can be very specifically tailored to the company and relates primarily to the rights and obligations of the shareholders or members of the company.

Shareholder Agreements usually provide that in the event of an inconsistency with the company Constitution (if there is one), then the Shareholder Agreement will prevail provided it does not conflict with the Corporations Law. 

Shareholder Agreements usually address practical issues such as:-

  • Management of the company;
  • Capital contributions and company loans;
  • How directors are to be appointed;
  • Meetings and voting;
  • How decisions are to be made;
  • Shareholder obligations;
  • Distribution of dividends;
  • Confidentiality provisions;
  • Dispute resolution and deadlock procedures; and
  • Exit strategies including buy-out procedures and sale of shares and how shares are to be valued;
  • Retirement of shareholders; and
  • Other special conditions as may be agreed.

Legal Resources

Further information and professionally drafted documentation can be found here:-

Shareholders Agreement

Shareholders Buy/Sell Agreement

Corporations Act, 2001

 

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