The Importance Of A Shareholders Agreement

A Shareholders Agreement is a written agreement that covers the basic foundations for how the shareholders and/or directors of a company will act. It sets out a framework covering such issues as company funding, structure, management, operations, direction succession and so forth, so as to help the owners deal with any future disputes.logo

When a company is formed, the Constitution sets out some general provisions about how the company is to operate. However, the Constitution fails to cover some of the most fundamental and common problems experienced when running a business. Here are some of the issues that a shareholders agreement can cover.

A shareholders agreement can bind the shareholders to protect the company and control who becomes a future shareholder. Some of the important issues that the agreement can deal with include:

 

  • Company funding – What security will be provided if the company needs to borrow? What if there is a disagreement about personal guarantees? What if one party cannot contribute any more working capital?
  • Unequal contribution and remuneration – What if your business partner wants to spend part of their time working on another business, or just spend less time than you working in the business? What happens to any company profits or dividends? What if you are achieving your targets in the business but your partner isn’t?
  • Disagreement on operational issues – What happens if you want to spend money to upgrade your business computers but your business partner doesn’t or you disagree on the future direction of the business?
  • Share buy out – What happens if your partner wants to sell their shares, you cannot afford to buy them, and the partner decides to sell the shares to someone you can’t work with? What is the value of the shares? What if a partner sells out and then starts their own business and poaches your clients?

 

 

 

  • Death of a partner – What happens if your partner dies? Their shares in the company may be transferred to the spouse, so you could end up in business with another person who has little time to contribute to the business, but who is entitled to share in the profits.
  • Incapacity of a partner – Can the business continue without your partner if they are incapacitated? Are they still entitled to the profits even though they are not contributing in the daily activities of the business?A shareholders agreement can include the terms of a ‘buy/sell agreement’ if a partner is to be bought out. Such an agreement can have many outcomes. Here are just some of the many possibilities.
  • The other partners may be given a first option to purchase at a price determined by agreement or formula. If the existing partner(s) doesn’t purchase, the shares requirements can be placed on the buyer. For example, any outside buyer must be acceptable to the existing partners.
  • Compelling the remaining partners to purchase the share of a retiring, disabled, or dying partner. In the case of death, funding can be provided by way of life insurance so there is a guaranteed source of money for the purchase.Finally, when entering into an agreement amongst business partners it is very important to do so at the outset, since this provides a mechanism to deal with issues that can arise in the future.

    This article is provided courtesy of www.australianbiz.com.au, a website that provides up-to-date tax information, management tools and other services to assist business owners and financial decision makers to better manage their business and income tax obligations. Included is a monthly KPI calculator and other business calculators, monthly tax updates, articles on practical business issues, business templates and the tools to assist businesses in finding a suitable accountant.

  • Death of a partner – What happens if your partner dies? Their shares in the company may be transferred to the spouse, so you could end up in business with another person who has little time to contribute to the business, but who is entitled to share in the profits.
  • Incapacity of a partner – Can the business continue without your partner if they are incapacitated? Are they still entitled to the profits even though they are not contributing in the daily activities of the business?A shareholders agreement can include the terms of a ‘buy/sell agreement’ if a partner is to be bought out. Such an agreement can have many outcomes. Here are just some of the many possibilities.
  • The other partners may be given a first option to purchase at a price determined by agreement or formula. If the existing partner(s) doesn’t purchase, the shares requirements can be placed on the buyer. For example, any outside buyer must be acceptable to the existing partners.
  • Compelling the remaining partners to purchase the share of a retiring, disabled, or dying partner. In the case of death, funding can be provided by way of life insurance so there is a guaranteed source of money for the purchase.Finally, when entering into an agreement amongst business partners it is very important to do so at the outset, since this provides a mechanism to deal with issues that can arise in the future.

    This article is provided courtesy of www.australianbiz.com.au, a website that provides up-to-date tax information, management tools and other services to assist business owners and financial decision makers to better manage their business and income tax obligations. Included is a monthly KPI calculator and other business calculators, monthly tax updates, articles on practical business issues, business templates and the tools to assist businesses in finding a suitable accountant.