Clip the free ride, sign shareholders agreement

Free ride! Yes it is the same feeling you as shareholder will develop for majority shareholders or the directors, provided if your “sweat equity” is not undervalued. Obviously as investor one would opt for a solid investment but conflict s arise one way or the other.

Then why there is a need for shareholders agreement. In scenarios like

 1. Non fulfillment of desired performance by the “sweat equity” holders. Or

 2. The poor distribution of profit dividend, debts and lending or the equity distribution, Bail out or fallback mechanisms are necessity. Apart from that you need something in written to claim your right in the court.

Apart from above mentioned scenario there can be numerous other reasons why share holder agreement is needed. For any business shareholder’s hold the key. But shareholder needs security especially the minor one. Shareholder Agreements are contracts that regulate the rights and obligations of Shareholders (Members) of a company.

 On a legal note law provide certain parameters which enable the shareholder to safeguard his interest. In Australia Corporations Act 2001 (Cth) serve as legal directive for companies to formulate such agreements. Quite understandably so because you never know if a majority shareholder will be buying the stocks and trying to conduct hostile takeover, which increases the possibility that your Profit dividends might take a dent. In situation like these, shareholder agreement compels majority shareholders and directors to sought approval of the rest of shareholders. Simply we can say that decision making because of this agreement will not rest with directors, rather shareholders hold the key.

So in principle there are two main operatives of these agreements

1.      Directives for decision making and managerial mechanism.

2.      Safeguard of minority shareholders rights.

What mechanism shareholders agreement lay out for new investors?

In case of ownership of the shares, be it change of hands or death of existing shareholder, this shareholder agreement provides working mechanism for new owners providing legal cover to the existing owners.

So what exactly constitutes a shareholder agreement?

Shareholders Agreements generally regulate and control matters on which a Company's Constitution (or the Replaceable Rules) as the case, may be are silent.  Shareholders Agreements may include provisions relating to

· Confidentiality: obligations on the parties.

· Dilution of a member’sinterest: provisions requiring a certain Members level of interest in the company to be maintained at a certain level.

· Dispute resolution mechanism.

· Director's meeting procedures.

· Dividend distribution policy:for the distribution of profits.

· Exit strategies: agreement to sell their shares on the occurrence of certain events such as death, trade sale, and an initial public offer is made by the company to list on the Australian Stock Exchange (ASX).

· Financing policy:  the way that the company is to be financed including the obligations of the Members to invest further equity or loan funds to the company.

· Operating procedures for almost any part of the company's operations from budgeting and accounting to the way in which directors meetings are conducted and minutes recorded.

· Objectives of the company: specify and limiting the business activities of the company.

· Obligations and rights of shareholdersin certain circumstances.

Protection of any minority shareholder rights.

· Shareholder loans: requirements and terms and conditions for any shareholder loans that may be made by shareholders and directors.

· Restraint of tradeon directors and shareholders.

· Rights to appoint directors: a shareholder's right to appoint directors and the number of directors;

Pre-emptive rights to acquire another Members shares in the event that one member wishes to sell (for whatever reason).

· Warranties by the shareholders.

· Voting in certain situations involving major decisions.

But all that needs to be formalized beforehand. Line of business needs to be clarified so as to avoid any inconvenience at your end no matter if you own the company or are just a small part of it. Key is that you must be safe legally. Net lawman provides such comprehensive shareholder agreement form that cover various situations.

Is there any way to stop the operation constitution of the company?

Yes, you can stop the operation of the constitution of the company by entering into shareholder agreement. Although all matters relating to the management, operation and structure of the company are regulated by statute, this agreement is comparatively unregulated.  It is therefore open to the parties to make whatever arrangements they wish.  It is a private document that defines the procedure for running the internal affairs of the company. It does not need to be registered at Australian Securities and Investment commission (AISC). Shareholders' agreement should always be considered when there are between two or more shareholders in a company. Shareholder agreement usually protects the rights of minority of the shareholders. Shareholder’s Agreement should be a reflection of a company’s commercial needs and not simply an exercise in legal technicalities. The courts can invalidate the agreement if there is injustice with minority of the shareholders. The shareholder agreement must be in written form and it must provide the information about:

·         dividends payment;

      limitations on the transfer of existing shares;

·         options to acquire each other’s shares in certain circumstances;

·         what is to happen on the retirement, death or incapacity of a shareholder;

·         voting procedure;

·         non competing with the business of the company.

What is the law about shareholder agreement?

The constitution of the company will run the affairs of the company if you have not entered into shareholder agreement. The Corporation Act 2001 validates the shareholder agreement. The validity of the agreement depends upon its fair terms. The shareholder agreement form is superior to the constitution of the company. In case of conflicts between the two documents, the provisions of the shareholder agreement will prevail. The shareholder agreement provides the solution to problem that may arise on the death of the shareholder. If there is no shareholder agreement in place, then the shares owned by the deceased would either be inherited by the person or persons designated in the shareholder's will.

Purpose

It promotes the mutual understanding and avoids the disputes among the shareholders. It minimises the monopoly of the majority of the shareholders. It avoids the deadlock situation because the company constitution does not provide the information about the selling of shares on retirement, death, disability or on any other reason. The company constitution is silent on the various subjects and it provides the les protection to the minority of the shareholders. The important feature of a Shareholders Agreement Australia is the adoption of clear rules for the minority to be able to require the majority to include them in a sale and the ability of the majority to force the minority to join in the sale

Advantages

Shareholder agreement takes place where the companies’ law is silent. Shareholder agreement forms protects the business ideas and structure of the administration of the company. No one can inspect such a document under the la .It is a legally binding agreement. Shareholder agreement template has numerous advantages. Such as:

• Constitute overall business strategy;
• Protect the management strategy of the company;
• Protect the confidential information;
• Protect the interest of the minority of the shareholders;
• Promote mutual understanding among the shareholders

Features of the shareholder agreement

• Obligations of the company to the shareholders;
• how shareholders will maintain their rights if they are not present at meetings;
• roles of directors and actions by the company or a director which require shareholders’ consent: controls and redistributes power between shareholders so that majority shareholders cannot force decisions;
• new shareholder rights and restrictions: even if he is a trustee in bankruptcy;
• how to deal with new intellectual property;
• transfers of shares and rights of pre-emption: when allowed, under what conditions and to whom;
• exit strategy: the hidden bomb if neglected;
• key man insurance;
• publicity about the deal;
• confidentiality;
• use of a shareholders own assets in the business.

Net Lawman provides the following shareholder agreements. Such as:

Shareholders' agreement: new company; one shareholder is major lender

 A comprehensive shareholders agreement for a new company that has also been financed with debt from a big lender as well as equity. Use this agreement to protect the rights of each shareholder against each other and the debt provider and also for setting down the strategic management of the company. This agreement could be put in place at the time of incorporation or shortly afterwards in order to set out the balance of shareholder power as the company grows. It is suitable for companies where all or some shareholders are also directors, or where there is a mix of active and inactive owners.

Shareholders' agreement: existing company; one shareholder is major lender

 A comprehensive shareholders agreement for an existing company that also has debt financing from a big lender such as a business angel or venture capitalist. Use this agreement to protect the rights of each shareholder against each other and the debt provider and also for setting down the strategic management of the company. This agreement could be put in place perhaps on the introduction of new shareholders or directors, a new financing round, or after restructuring, or simply to redress the balance of shareholder power as the company grows. It is suitable for companies where all or some shareholders are also directors, or where there is a mix of active and inactive owners.

Shareholders' agreement: existing company; shareholder-directors

 A comprehensive shareholders agreement for an existing company. Use this agreement to protect the rights of each shareholder against each other and also for setting down the strategic management of the company. This agreement could be put in place perhaps on the introduction of new shareholders or directors, a new financing round, or after restructuring, or simply to redress the balance of shareholder power as the company grows. It is suitable for companies where all or some shareholders are also directors, or where there is a mix of active and inactive owners.

Shareholders' agreement: new company; shareholder-directors

 A comprehensive shareholders agreement for a new company. Use this agreement to protect the rights of each shareholder against each other and also for setting down the strategic management of the company. This agreement could be put in place at the time of incorporation or shortly afterwards in order to set out the balance of shareholder power as the company grows. It is suitable for companies where all or some shareholders are also directors, or where there is a mix of active and inactive owners.

Share transfer form: private company

This document creates a transfer, sale or purchase of shares in a private Australian company. To affect the legal transfer of shares in an Australian company listed on the stock market, you will need a stock broker.