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.