A shareholder’s agreement is a useful tool that you can implement at the early stages of your business development that can provide protection and guidance in tricky situations. A shareholder’s agreement is a binding legal document that sets out the rights and obligations of the shareholders of a company. When drafted correctly, it provides clear guidance as to who controls the business, how the business will be managed and various other nitty gritty details. A poorly drafted shareholders agreement on the other hand will give you nothing but a strong headache.
We explore below, some of the common pitfalls in shareholder’s agreements and how to avoid them:
1. The interaction with your constitution
A shareholder’s agreement works alongside your company constitution to provide a foundation for what a shareholder can and can’t do, as well as their rights and obligations. Ensuring that you have a tailored shareholders agreement that takes into account the needs of the business and fills any gaps in your constitution is important.
2. Not looking to the future
When issuing shares to raise capital and therefore determining the terms of the shareholders agreement, it is important to consider the future needs of the business. That is, it is important to note that with each share that is issued, the voting power of any one member will be diluted and may change the balance of power between various shareholders.
3. Not covering all the issues
There are a wide variety of worst case scenarios to consider when drafting a shareholder’s agreement. The idea being that not all of those scenarios (and hopefully none) will ever arise and that the shareholder’s agreement will rarely need to consulted. However, having a comprehensive shareholder’s agreement means that all members will know exactly where they stand on most issues and there will little room for ambiguity and therefore dispute.
4. Thinking “what can go wrong”
At the initial stages of your business, the lines between the management of the company and board and also shareholders are generally quite blurred. This is usually acceptable in the early days. However, as your business grows, it is important to consider the roles of each of these parties in both the day to day management and strategic decision of the company (ie. by appointing directors to the board). A shareholder’s right to appoint directors is provided for in the shareholder’s agreement. The shareholder’s agreement should also set out other matters which require shareholder approval, and which matters are reserved for the board. Outlining all of these matters in advance can mitigate disagreement and the breakdown of trust.
5. Not having a shareholder’s agreement at all
This may be an obvious point, but ensuring that you have a well drafted shareholder’s agreement in the first place is imperative. In our experience, the cost and effort involved in fixing a problem after it has already arisen is significantly more than what it would have cost to address these issues in advance.
The Gladwin Legal team can assist with:
- drafting a new shareholders agreement suited to your business’s needs;
- reviewing and amending an existing shareholders agreement;
- advising on conflicts that arise by shareholders or directors;
- advising on share issues and transfers; or
- preparing tailored clauses depending on whether the client is founder or investor.
We have extensive experience in drafting, reviewing and advising on shareholders agreements. If you have any questions, please contact the Gladwin Legal team at or 1300 033 934.