🎯 Key Takeaways

Core Points:

  • Always create a shareholders’ agreement, even years into a business’s lifespan, to clearly define shareholder rights and responsibilities. This prevents future disputes.
  • Shareholders’ agreements should cover crucial aspects like dividend policies, buy-sell arrangements, and tag-along/drag-along rights. A lawyer can help structure this agreement.
  • Amendments to shareholders’ agreements require a pre-determined resolution (e.g., unanimous or supermajority). Plan for future business changes within the initial agreement.
  • Shareholders’ agreements are separate from share sale contracts and employment agreements, yet they often interconnect.
  • Valuation clauses in shareholder agreements are crucial to avoid conflict when shareholders want to exit. A formal valuation should be performed.
  • Consider incorporating clauses that address potential issues such as employee share ownership, family law events, and asset purchases.
 

🔍 Summary

Shareholders’ Agreements: Importance and Key Clauses

Shareholders’ agreements are vital for businesses with multiple owners. They go beyond a company’s constitution by detailing dividend policies, buy-sell arrangements (including insurance policies for disability or death), and tag-along/drag-along rights (allowing minority shareholders to participate in sales and giving majority shareholders the right to force sales). These agreements should be created from the start, but can be adopted later—though this is more challenging. Amendments require a pre-defined resolution process, typically unanimous or a supermajority. Failing to have a shareholders’ agreement can lead to disputes and costly legal battles, highlighting the importance of proactive planning.
 

Shareholders’ Agreements vs. Other Agreements and Common Clauses

A shareholders’ agreement differs from a share sale contract (governing share transfers) and employment agreements. However, these agreements can and should be integrated to prevent conflict. Unusual clauses can be added to suit specific needs, like restrictions on company asset purchases (e.g., high-value vehicles) requiring shareholder approval. The agreement can also tie employment to shareholding, preventing a shareholder from ceasing work and still holding shares. One example discussed was the dispute where a shareholder wanted a significantly inflated price for his shares, causing problems for the remaining shareholders.
 

Share Valuation, Tax Implications, and Dispute Resolution

Determining a fair share valuation is crucial. Simply stating a desired price isn’t sufficient; it should be determined using a proper valuation method. The sale of shares at a discounted price can trigger unexpected tax liabilities for the seller. Clauses like “good leaver” and “bad leaver” provisions can address this. Clawback clauses can also protect companies if employees leave within a specific time frame. Share dilution occurs when new shares are issued, decreasing the percentage ownership of existing shareholders, often used for fundraising or bringing in new owners. Disputes over shareholders’ agreements are common, often stemming from a lack of a formal agreement or poorly-drafted clauses, often ending in court.
 

Shareholder Structure, Dividends, and Director Duties

A shareholder can be an individual, a company, or a trust. Trusts are often preferred for asset protection and tax minimisation purposes. Transferring shares to a trust after the business is established requires valuation, potentially triggering capital gains tax. Operating a business through a trust or sole proprietorship limits the ability to bring in additional business owners; a company structure offers more flexibility in this area. Dividends are paid from retained earnings, not current profit, and are subject to franking credits which affect the shareholder’s tax liability. Directors have specific duties under corporate law (acting in good faith, avoiding conflicts of interest, and maintaining accurate financial records), failure to uphold these can result in significant penalties.
 

Joint Ventures and Partnerships

Joint ventures differ from partnerships; JVs are for specific projects, while partnerships are ongoing business arrangements. Joint venture agreements should detail responsibilities, profit-sharing, and intellectual property ownership. Partnerships are considered by some to be outdated, often lacking clear stipulations regarding profit distribution and asset ownership, leading to future conflicts. It is generally recommended to avoid partnerships in favor of a company structure to avoid potential issues.
 

Legal and Accounting Fees

Legal and accounting fees associated with business restructuring and legal agreements are generally tax-deductible if directly related to business operations.