Think HBR

Five reasons why smart companies have shareholders agreements

Kym Butler
Butlers Business and Law
When forming a new company, choosing to put a shareholders agreement in place is a smart business strategy. A shareholders agreement can be adapted to fit the needs of your business and may cover important information such as who can be a shareholder, who can serve on the board of directors and the value of shares of stock. While there is no legal requirement for a company to have a written shareholders agreement, the document is an effective business strategy used to prevent costly disputes when disagreements arise.
There are five key reasons why shareholders agreements are an effective business strategy for smart companies:
1. Management
The way a company is to be managed should be set out by a shareholders agreement during the formation of a new business.
The agreement should outline the responsibilities of members or directors so that they understand what is expected in this role. This may include required productivity levels expected from members or directors and the amount of non-chargeable work allowed during work hours. This prevents disagreements as to the expected level of commitment to the company.
2. Directors appointments
A shareholders agreement should specify the shareholder’s right to appoint a director and how they can lose this right. For example, an agreement may specify that the right will be lost when the shareholder’s shareholding drops below a specified percentage. More importantly, the agreement may also include provisions so that shareholders may not remove another shareholder’s appointed director. This is an important business strategy for preventing uncertainty regarding the lawful appointment and removal of a new director.
3. Decision making
The agreement should also outline the amount of votes required to pass certain types of decisions. Importantly, it may provide methods for resolving disputes where a deadlock occurs during the voting process. This may include provisions such as put and call options or possibly the forced ending of a company.
4. Preventing investment in rival businesses
A shareholders agreement may also contain a non-compete clause to prevent members from investing in rival businesses.
This will usually contain a description of the business of the company and how company resources may be used. This is crucial for protecting your business and supporting the financial interests of shareholders in a company.
5. Exit strategy
The agreement should also outline an exit strategy for members, which may include a buy-out, listing or sale of business. This is important for preventing disputes as to the value at which certain shareholders may exit.
Considering the needs of your business
Depending on the needs of your business, a good shareholders agreement may also consider:
· The share split and types of shares;
· Valuation of shares;
· Actions that require the consent of shareholders;
· Allocation of new shares; and/or
· The liability of shareholders when the company is in debt.
Finally, it is important to seek legal advice before finalising the agreement to ensure your business is protected when disagreements arise.
For further information call (02) 4929 7002, email or visit
Kym Bulter Kym Butler
Is the founder of Butlers Business and Law. He has decades of experience both as a legal practitioner and chartered accountant. He is an expert in business structuring, asset protection and taxation.