Do I Need A Shareholders’ Agreement?

Whilst not required by law, there are many benefits to having in place a shareholder’s agreement. This article asks five key questions to ask yourself before deciding whether having one in place is right for your business.

1. What is the relationship like amongst your shareholders?

What brought you together initially with your co-shareholders? You may be thinking about starting your first business with close friends or family members. Or you may be expanding to a new venture with a long-time experienced business partner. Whilst it may seem counter-intuitive, the “friendlier” the relationship, the more important it is to have a shareholders’ agreement.

At times, difficult decisions may need to be made in a business, which require objectivity, a financial focus and strategic thinking. Emotional connections between shareholders’ may give rise to the likelihood of tension and clouded thinking, increasing the chance of a dispute. A shareholders’ agreement serves as an unbiased and unaffected decision maker, which may make the hard decisions feel less personal. Do you feel comfortable asking hard questions of your co-shareholders?

2. What are your future plans for the business?

You might be planning to be in the business for the remainder of your working life, but in reality, how likely is this to occur? Shareholders’ agreements can facilitate a smooth transition out of the relationship, outlining how a departure might impact the business, such as establishing arrangements for a shareholder to be bought out of the business.

A shareholders’ agreement also provides a great deal of structure for your business. A shareholders’ agreement may cement rules such as the jurisdiction of the business, majorities, meeting rules or dividend distribution. Do you want certainty in your commercial relationship?

3. What are your co-shareholders like?

This question requires contemplation of the personality and personal lives of your co-shareholders. Are your co-shareholders in a position where they can commit themselves fully to the business for the next 10 years? Or is this a part-time venture to accompany a very busy job? Do you feel that they are completely emotionally invested? Conversely, if you wish to only be involved in the business for a limited amount of time or cannot devote yourself fully to the venture, are your co-shareholders on the same page? Do you all share the same appetite for risk? A shareholders’ agreement can reduce the potential costs of a dispute occurring, or even prevent one from occurring at all.

4. What kind of industry is your company in?

Are you in a fast-paced, high profit and high-risk industry? Or is the business a creative outlet? Is there a large amount of confidential information that will need to be quarantined? Will the shareholders have access to commercially sensitive information, or will they be potentially poached by competitors?

If you are in an industry that is likely to generate high dividends (i.e. capital will not be reinvested regularly into the business), then a shareholders’ agreement is essential to prevent disputes. Furthermore, in an industry with high value assets, a shareholders’ agreement is essential to dictate the terms of how a shareholder might leave the relationship, or how new shareholders might join. A shareholders’ agreement can also be part of an application for a loan, demonstrating a level of formality in your business.

5. What is your budget like?

Some small business owners may be tempted to bypass establishing a shareholders’ agreement due to their concern at the cost of preparing one.

Though not a legal requirement, a shareholders’ agreement should be on your ‘must do’ list no matter your budget. As time goes by, relationships can become strained, paths diverge and economic conditions flutter. Establishing the rules beforehand can prevent future costs involved in mediating and resolving potential disputes.

If you are assessing whether a shareholders’ agreement is right for your business, or if you are currently facing a dispute with other shareholders, contact your team at Streeterlaw on 02 8197 0105 for a Client Appraisal Conference to discuss your situation and how we can help you set up your business for success.

Written by Mark Streeter

The Director of Streeterlaw, Mark has been practicing Law since 1994. He has attained his Masters of Law in 1999 and in 2006 was awarded his Specialist Accreditation in Commercial Litigation. Mark is a member of ARITA, a graduate of the AICD and a member of AICM. A member of STEP, Mark enjoys working in the area of Wills and Estates. In 2020 Mark is the Chair of STEP NSW.

Call us on 02 8197 0105 to book an appointment with Mark Streeter!