If you own a business with one or more business partners, you’ve probably heard the term shareholder agreement (sometimes called a shareholders agreement or partnership agreement). But what is that, and do you actually need one?

In short: if you’re running a company with more than one owner, a shareholder agreement is one of the smartest investments you can make to protect your business and your relationships. When relationships sour, problems arise or even just when one person wants to leave, a shareholder agreement can be the difference between a drawn out and costly dispute and a neat, easy exit.

What Is a Shareholder Agreement?

A shareholder agreement is a contract between the business owners (shareholders, or partners). It’s a private document that is tailored to each business, and sets out things like:

  • How key decisions will be made. For example, some might require unanimous agreement, where others only require a majority of partners to agree. Some decisions might be able to be made by one person (eg, the founder), or require the founder’s consent.
  • How the company will be run. Will some people work in the business, while others contribute capital? Do people need to work a certain number of hours? Will it employ people?

  • Money. Who draws a salary? How will profit be shared? What if there is no profit? What if one person wants to take all the money out of the company, while another wants to reinvest it?

  • Who owns the clients, and the IP? Has somebody brought this with them, and what happens if they want out?

  • What happens if a shareholder wants to sell, leaves, or passes away?

  • What are the rules about bringing in new shareholders?
  • When somebody leaves, what kind of non-compete clauses are there? How long before they can go and work for a competitor?

Think of it as a “rulebook” for your company that sits alongside your company constitution. While the constitution covers the nuts and bolts requirements under the Corporations Act, the shareholder agreement is tailored for the business, by the people who own it.

Why Do You Need One?

Because while most businesses start with a handshake, some energy and a whole lot of good intentions, that doesn’t always last. As the business grows and as time goes on, so can the potential for disagreement. The initial burst of energy can fade, and if the business partners aren’t on the same page about where things are going and how they’re going to work, disillusionment and resentment can set in. Things might be moving slower than expected, or one person feels like they’re doing more than the other. Somebody changes their mind about being involved, or wants to move interstate. Things happen!

Even the process of creating a shareholder agreement helps prevent disputes, by working through some of the potential issues that might arise, and gives everyone clarity around what would happen in a range of common scenarios.

When Should You Put a Shareholder Agreement in Place?

The best time is before there’s a problem—ideally when you’re starting out, and working through how things are going to run. Sometimes, the process of creating a shareholder agreement makes people realise that their expectations are completely different to their potential business partner. If that’s the case, realising that early is a blessing.

But it’s never too late to put one in place, even for an established company. It’s also useful to revisit a shareholder agreement from time to time, to make sure that it still reflects the business, its owners and their needs.

Unfortunately, we often see clients come to us after a dispute has already started, when the mis-match between expectations has already set in. The time, cost and stress of working through a business split will invariably dwarf the cost of creating a shareholder agreement.

What to Include in a Shareholder Agreement

A well-drafted agreement usually covers:

  • Shareholder rights and responsibilities

  • Voting rights and decision-making powers

  • Dividend and profit-sharing arrangements

  • Exit strategies and share sale processes

  • Procedures if a shareholder dies, becomes disabled, or wants to leave

  • Rules for bringing in new shareholders

The process of working through scenarios and what-ifs is often illuminating and valuable, and gets people on the same page.

If you’d like help drafting a clear, tailored shareholder agreement for your business, or how to work through a tricky situation with one, Sinclair + May can guide you through it.