6 Reasons why your Business needs a Shareholders Agreement

Risk is a persistent little pest, a cunning nuisance that only grows as your business does, nibbling away at your wildest goals. Unfortunately, the only way to rid yourself of risk is to confront it with a call to arms.

If conflict isn’t your cup of tea, we’ve got your back with tailored legal advice for all Sydney business owners rallying for an ally. So whip out your weapon of choice (preferably a pencil and paper) because we’re here to empower you with risks kryptonite, the Shareholders Agreement.

What is a Shareholders Agreement?

Regardless of whether you’re flying solo, entering a partnership or establishing a company, one thing is certain – you’re going to need some enforceable guidelines to keep risk in order. Thankfully, a Shareholders Agreement is your ticket to protecting the interests of your business.

By taking pre-emptive action and noting down guidelines to handle potential conflicts in advance, a Shareholders Agreement serves your business investment and helps manage your shareholders’ expectations. So if your business doesn’t already have one in place, this might change your mind. 

6 reasons why your business needs a Shareholders Agreement

#1 Roles and Responsibilities

Time is of the essence when it comes to risk; the best bet is to protect your business from the get-go. In a Shareholders Agreement, we clarify your shareholders’ roles within the business by defining each individual’s responsibilities. If any issues arise down the line with your shareholders’ expectations, you’ll know exactly where to look and be well equipped to deal with the situation.

#2 Exit Strategy

Goodbyes can be challenging, but they don’t have to be a risky affair. Life will be easier with an outlined exit strategy if the time ever comes to part ways in your business. Generally speaking, this clause of a Shareholders Agreement will detail how shares are listed for sale and how the value of shares is determined when a shareholder leaves. Depending on how you operate, you may also want to add a few extra notes to account for those loose ends and ensure a civil and seamless transition.

#3 Share Price

Dealing with money in business can be perilous, so we’ll want to go ahead and add a terms of sale clause to your Shareholders Agreement. The terms of sale clause will detail the mutually agreed upon share sale price, which is used to assign ownership of your business by outlining the number and types of shares being sold. With this safely in place, we can ensure complete transparency and prevent a potential financial conflict collision from occurring down the line.

#4 Restrictions

Chances are you’re not operating a zoo, and either way, the last thing we want is a rogue agent on our hands. So let’s keep operations in line with some restrictions to ensure that any risks are handled swiftly with your Shareholders Agreement. For example, setting a non-competition clause will mitigate the risk of shareholders competing with your business once they have exited. It’s best to consult with your legal team to ensure that all the bases are covered as a rogue agent won’t be your only consideration when drafting restrictions.

#5 Decisions

There needs to be people within the business who can call the shots and have the final say on executive decisions. If this isn’t clearly defined, your business may be susceptible to internal conflict, which doesn’t sound healthy. With a Shareholders Agreement, you can outline the founding shareholders who can make these decisions, such as appointing directors and deciding when they can be removed, alleviating any risk of conflict through accurate authority.

#6 Payment and Shareholders Indemnity

Last but not least, a Shareholders Agreement will manage the payments of your business’ earnings to shareholders and the shareholder’s indemnity for directors. To manage the payments of your business earnings to shareholders, you’ll need to consider your options. Are you going to reward shareholders with dividends? If so, how will you structure your dividends?

The last thing your valued shareholders want is to take responsibility for someone else’s misfortune. So your Shareholders Agreement can double down on the security of your shareholders by including an indemnity agreement that protects one part of a transaction from the risks or liabilities created by another party.

You can keep all of your shareholders happy and on the same page by ironing out these finer details from day dot.

How do you draft a Shareholders Agreement?

Bear in mind each Shareholders Agreement will vary depending on the circumstances and shareholders of the business, so if you’re a Sydney business looking to set yourself up with a custom plan to minimise risk, reach out to our team. Let’s get your business protected with an air-tight Shareholders Agreement today.