A Guide for Partnership or Shareholders Agreements in Australia

Exciting ideas often flourish when two or more innovative minds unite to transform their vision into a real-life business. What begins as a dynamic and creative partnership can evolve into something truly remarkable as the ‘great idea’ blossoms into a successful business. 

However, to ensure that a partnership remains strong and productive, it’s important to manage expectations from the very beginning. The best way to manage the roles, rights and expectations between business owners is by entering into a partnership and shareholders agreement – also known as a stockholder agreement.

In this comprehensive guide, we’ll explore the key elements of shareholders contracts and provide you with insight to help you navigate the process effectively.

What does a shareholders agreement include?

A shareholders contract is a legal document that sets out the rights and obligations of company shareholders with the primary aim of protecting the interests of the company. A shareholders agreement is formulated to address issues that may occur throughout the business’ life by deciding in advance how such issues should be dealt with.

What does a shareholders agreement include?

There is no one correct form, and each draft of the shareholder contract will vary depending on the circumstances of the business and the shareholders of that business. Nevertheless, a good shareholder agreement template should cover at least the following areas:

Roles and responsibilities of shareholders

Clearly define the roles and responsibilities of each shareholder, as well as the business structuring. This includes provisions for appointing and removing directors, as well as their authority regarding decision-making processes.

Voting and quorum procedures 

Once roles and responsibilities are determined, it is essential to detail the voting and quorum procedures. This should include specifying how decisions will be made, where they will take place, who will be involved, and how resolutions will be passed.

Funding and financial policies

The agreement should outline the company’s funding policies, including provisions for raising additional capital, profit distribution and financial reporting.

Dispute resolution

Another key aspect is setting the boundaries for conflict resolution. A shareholder agreement should include a clear process for resolving disputes between shareholders, such as mediation or arbitration. This helps to avoid costly and time-consuming legal battles.

Share transfer and exit strategies

Although a partnership agreement is created with success in mind, there may be instances where it needs to be revisited or reworked. That’s why the agreement should specify the conditions under which shareholders can transfer their shares, as well as the process for exiting the company.

Exit strategies – for example, include:

• What happens if a shareholder wants out of the business within the first 1-2 years;
• What happens if one shareholder wants to sell their shares;
• What will happen if there is a dispute between shareholders and one or both shareholders want out of the business;
• The price of any share sale/purchase;
• Restrictions on outgoing shareholders competing against the company;
• The ability for founding shareholders to veto certain fundamental company decisions or the percentage of shareholders’ approval required to do so;
• Payment of company earnings to shareholders; and
• Shareholders indemnity for directors.

Can you write your own shareholders agreement?

Yes, it is possible to draft your own shareholders agreement; however, due to the complexity of the legal aspects, we recommend that you have a professional lawyer to help you write a shareholders agreement. 

A qualified lawyer can ensure that your agreement complies with relevant laws and regulations and that it adequately protects the interests of all parties involved.

Legal binding nature of shareholders agreements

In order to have a legally binding shareholders agreement, it’s important to draft a contract that sets clear terms and conditions, outlining the responsibilities of all parties. Once signed, if a shareholder breaches the agreement, the other shareholders may have grounds for legal action.

What are the pitfalls of a shareholders agreement?

Some common shareholders agreement mistakes include the following: 

Not addressing important information

Failing to include key provisions or leaving out important details can lead to ambiguity and potential conflicts down the line. Ensuring that your agreement covers all the necessary elements helps to keep all parties involved protected. 

Using confusing language

Using unclear or ambiguous language can make the agreement difficult to interpret and enforce. Striving for clear, concise, and unambiguous language throughout the document is key.

Not establishing dispute resolution strategies

As mentioned earlier, having a clear process for resolving disputes is essential. Neglecting to include such provisions can lead to costly and complex legal battles.

Not planning for future changes

It is important to anticipate and plan for future changes in the company’s structure or shareholder composition to avoid complications down the line. Drafting an agreement that is flexible enough to accommodate growth and change in the business helps to ensure adaptability over time.

Having ambiguous processes

Unclear or undefined processes for key aspects of the agreement, such as share transfers or decision-making, can lead to confusion and potential conflicts. Ensure that all processes are well-defined and understood by all parties when signing the contract.

Shareholder vs. founder agreement 

While both are legal documents for a company, there are also key differences between them, including:  

Final tips for creating a shareholders agreement

In conclusion, a well-drafted partnership or shareholders agreement is essential for ensuring the long-term success and stability of your business venture. Some final tips to keep in mind in the process include:

• Work with a qualified legal professional when drafting shareholder contracts to help ensure your agreement is comprehensive and legally sound.
• Review and update the agreement regularly as the company evolves.
• Communicate openly and honestly with all shareholders throughout the process.
• Consider the potential for future growth and changes in the company’s structure. 

If you need legal assistance in drafting and reviewing a partnership agreement in Australia, or if you have any questions about business law, don’t hesitate to contact us. Our team of business experts is dedicated to creating shareholders agreements that focus on commercial success. 

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