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How shareholder agreements help entrepreneurs mitigate risks

The introduction of a shareholder agreement is a simple way for companies to appropriately consider future risk relating to shareholders.

Too often we see businesses operating under a company structure fail to take the appropriate steps to plan for the future, including what happens when they decide to grow, adapt or change in order to achieve their goals, both short and long term.

Whether it’s a new startup or an existing business, the fundamental entrepreneurial mindset often dictates that the primary focus is set on the development and success of the business, and rightly so. But a key cog in achieving true success is planning for how you will effectively deal with issues and mitigate risks before they arise.

The introduction of a shareholder agreement is a simple way for companies to appropriately consider future risk relating to shareholders and potential scenarios that might cause disagreement or disruption among business partners.

This is particularly appropriate for small businesses with a small number of shareholders where the potential for disagreement may be greater than usual.

While the Corporations Act doesn’t require companies to have a shareholders agreement, it’s an extremely useful tool to clearly set out how the rights, responsibilities and obligations of shareholders are managed into the future.

What is a shareholder agreement?

A shareholder agreement is a written agreement between the shareholders or partners of a business. It sits outside the Corporations Act and the terms of the agreement are negotiated by the shareholders to govern their relationship and business arrangements, rights, responsibilities, obligations, liabilities and interests.

The goal of a shareholder agreement is to draft an agreed approach for quickly resolving issues with certainty and efficiency. An example might be when one shareholder decides to sell their shares.

Unlike a constitution, a shareholder agreement doesn’t need to be made public and can remain confidential between the shareholders of the company.

What are the benefits of a shareholder agreement?

Not only can a shareholder agreement assist in providing structure around the organic development and growth of the business but it will also act to govern the relationship between shareholders.

This includes managing their expectations and providing clearly defined mechanisms to effectively address issues before they impact on the performance of the business.  

Regardless of the size of the company, shareholders will generally have differing priorities, which may change and develop over time. As such, careful consideration needs to be given to how the fundamentals of their business relationship are managed.

What does a shareholder agreement typically deal with?

A shareholder agreement will typically deal with key considerations, including:  

  • management of the company, including decision making
  • the board of directors, and who gets a seat at the table
  • capital raising, both internal and external
  • how profits and losses are dealt with
  • the transfer or sale of shares by shareholders, including exit mechanisms
  • restraints on shareholders exiting the company
  • how disputes between shareholders are resolved.

By addressing these key considerations from the outset, shareholders ensure they are openly planning for the future by clearly identifying the parameters under which the company will operate. It’s ideal to go through this process before disputes or disagreements arise.

A shareholder agreement also gives shareholders comfort in knowing that they have been a part of developing the fundamentals that govern their relationship.

If you’re looking to improve the way your company is structured or governed, or you need assistance drafting a shareholder agreement, BlueRock Partners can help. Feel free to get in touch to talk through your unique business needs.

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