Lawyers are often asked to draft shareholders agreements, most commonly for small and family businesses. These agreements work in conjunction with the traditional company constitution to govern the relationship between key stakeholders with more specific rules, rights and obligations. When incorporating a new company, stakeholders should carefully consider whether a shareholders agreement would help to better define their rights and obligations.Elizabeth Murphy, Maddocks Lawyers
Whilst company constitutions and shareholders agreements both govern shareholders' rights and obligations, they generally traverse different topics depending on the company's circumstances. The two documents should work in conjunction with each other and need to be carefully drafted to ensure they do not conflict or add uncertainty in circumstances where certainty is the objective.
Generally the answer is when the stakeholders want to put in place some specific rules about why the company exists, how it will be managed, who can be involved and how it will be owned in the future. We've grouped some of the common reasons under the following headings.
Corporations Law generally has the effect of providing a framework for pooling capital (through shareholdings) and managing that capital efficiently (by conferring appropriate powers on management to manage that capital). The Corporations Act 2001 (Cth) (Act) provides a framework for decision making, however a shareholders agreement can set down specific rules governing how the directors must act.
A shareholders agreement can:
A shareholders agreement can therefore give shareholders more certainty regarding when, and the nature of, decisions which directors must refer to them.
A normal constitution will have provisions regarding the issue and transfer of shares, and the process by which these transactions can take place. A starting point is that the power to issue shares or approve transfers rests with the directors, but they may also be required to offer shares to existing shareholders in proportions (known as 'pre-emptive rights').
Again, a shareholders agreement can more specifically regulate these transactions, including by:
Sign up with Cleardocs to continue reading
Also receive a copy of Cleardocs' top premium ClearLaw articles for free.SIGN UP FOR FREE
Shareholders who hold less than 50% of shares in a company may find themselves in the minority in a range of circumstances. For example:
A shareholders agreement therefore provides an opportunity to set out which decisions cannot be made without:
Shareholders agreements can also provide agreed dispute resolution procedures, which may have a focus on alternative dispute resolution. This can be useful given that, although the Act enables minority shareholders to bring oppression proceedings against a company, this process can be costly and time consuming with uncertain outcomes.
Shareholders agreements are also useful when contemplating unexpected events. If a shareholder dies or is no longer able to partake in the running of the business, a shareholders agreement can set out what rights and obligations the respective parties have.
The clearest example of these provisions is where key people have entered into an undertaking together on the basis that they will each be involved in the day to day management. If one of those people loses capacity or dies, then the remaining person(s) may wish to take control of the undertaking so that they are not required to operate it with the other key person's guardian or estate. Shareholders agreements can also describe how shares are valued and when they must be transferred and paid for.
A company constitution usually forms part of the documents produced when creating a new company, but can also be adopted at a later date. Company constitutions are, in part, governed by the Act. There are a number of provisions in the Act known as 'replaceable rules'. Company constitutions can incorporate these rules into their own constitutions or put in place provisions different from those set out in the Act. Company constitutions generally deal with matters including:
It is important to note that the company constitution binds all the shareholders, whether or not they were involved with how the document was prepared.
A shareholders agreement is a contract, which takes into account the specific purpose of a company, and the terms of which have been negotiated and agreed upon by all the company's shareholders. As discussed above, shareholders agreements are tailored documents which deal withspecific management situations or unexpected scenarios. As this document is a commercial agreement between the parties, the parties involved are able to contract whatever matters they wish to include, provided those matters do not conflict with requirements of corporations law.
Despite the fact that these documents cover similar territory, commonly there are a number of key differences between a company constitution and a shareholders agreement.
One important distinction is the way in which the documents are varied:
Another key difference between the two documents are the matters that are covered in the documents. A constitution is generally a broad overview of the relationships between the company and its board or the directors, the company and its shareholders and between the shareholders themselves. However, as discussed above, a shareholders agreement is a more tailored document which includes greater detail, especially with respect to corporate governance and share ownership.
If a shareholders agreement is in place, it generally contains a clause to the effect that, in the event of conflict with a constitution, the shareholders agreement prevails to the extent of the inconsistency.
However such clauses are not always sufficient to provide the parties with clarity, as the discussion in this ClearLaw article highlights.
The Cleardocs Shareholders Agreement contains a general clause dealing with inconsistencies, and then further pinpoints specific clauses which take precedence over those specific topics in the constitution. It is important to be clear when drafting the constitution or shareholders agreement that there are provisions dealing with any potential inconsistencies between the documents.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.
You can read earlier ClearLaw articles on a range of company-related topics.
Qualifications: BCom, LLB (Hons), Monash University
Alisha is a member of Maddocks Commercial team. She assists her clients in a variety of commercial matters.
Alisha has experience in:
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.