Why Shareholder’s Agreements are critical when starting a business

Shareholder’s Agreement is a contract between two or more partners that outlines the funding, structure and management of a business and its owners. It serves as an outline of each shareholder’s responsibilities and obligations for the direction of your business.

Why Shareholder’s Agreements are critical when starting a business

Why Shareholder’s Agreements are critical when starting a business

A Shareholder’s Agreement is a contract between two or more partners that outlines the funding, structure and management of a business and its owners. It serves as an outline of each shareholder’s responsibilities and obligations for the direction of your business.

A Shareholder’s Agreement is not essential for partners and shareholders under the Corporations Act, however it can be very useful if issues arise that affect shareholders (for example if a partner decides to sell his/her shares; suffers a disability or in the extreme of cases dies).

Any Agreement, as a general rule of thumb, is best organised at the beginning of a business venture when there is no disputes or disagreements between partners and everyone is on their best behavior and amenable to the relationship working out.

The development of this agreement preceding the commencement of a company is beneficial for all parties as it allows partners to consider procedures to follow regarding certain events such as the death or incapacitation of a partner/shareholder. As well as this, addressing critical issues at the outset rather than as issues arise provides a much smoother resolution. The procedure for admitting and terminating partners is also a beneficial service a Shareholder Agreement offers.

As this is a binding agreement, it provides set provisions to be applied to all issues that may occur in your partnership, eliminating the hassle of negotiations at the onset of problematic occurrences.

A Shareholder’s Agreement should establish the following:

  • Appointing a board of directors and establishing provisions relevant to the management of the company;
  • Decision-making power (it is usually agreed that major decisions require unanimous consent and identify problems that only require majority votes);
  • Funding and profit distribution;
  • The board’s approval of the transfer of shares;
  • Dispute resolutions.

It is fundamental that partners starting a business venture proceed with all the above points mapped out in writing to avoid disputes that will upset the business.

If you have began a business with one or more shareholder’s we recommend that you contact our Commercial Law Team at commercial@hatzis.com.au or call 3345 4388 and start this process to ensure everything runs smoothly when your business kicks off.

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