6 Reasons To Have a Shareholders’ Agreement

By Naomi Schulte • In Commercial LawComments Off on 6 Reasons To Have a Shareholders’ Agreement

A Shareholders’ Agreement is a contract between the shareholders of a company that regulates, amongst other things, the way in which business is conducted between shareholders.

THE GRILL’D DISPUTE

The recent case between the owners of Grill’d provides a real example of the importance of a company having a Shareholders’ Agreement in place:

  • The first Grill’d store was established in 2004 by Crowe together with his two friends, McNamara and Bainbridge. McNamara and Crowe were childhood friends whilst Crowe and Bainbridge had met in 1999 and were very close friends.  Crowe and Bainbridge bought out McNamara’s shares in 2011.
  • The relationship between Crowe and Bainbridge deteriorated and soured over the years, particularly when Bainbridge invested in a company that was a competitor of Grill’d.
  • Things became nasty and Bainbridge sought an order from the Court claiming he was denied access to the company’s books and records. Bainbridge also sought to have the company’s CFO and director removed from their roles on the basis that Crowe had breached his duties as a director and used the company’s staff and resources to purchase shares in another competitor company!
  • Crowe in turn sought an order from the court forcing Bainbridge to sell his 25% share in the company on the basis that their business relationship had deteriorated so much that it was impossible for them to work together moving forward.

6 REASONS

In light of the above dispute and our experiences with working with companies of all sizes, we set out 6 fundamental reasons why we believe that all companies with more than one shareholder should have a Shareholders’ Agreement in place:

  1. Shareholder Disputes – as the Grill’d example demonstrates, fall outs can happen to the best of relationships. It can be difficult at the outset of a business relationship to foresee such disputes however it is much easier to formalise the agreement when relationships are positive, rather than trying to reach an agreement when a dispute has already occurred and/or relationships have soured.  Shareholder Agreements provide a mechanism for dispute resolution meaning that shareholders can avoid resorting to costly court proceedings to resolve their issues.
  1. Certainty & Stability – parties are forced to address critical issues at the outset and consider the policies and procedures that the company will follow if certain events occur, for example, the death or incapacity of a shareholder. This allows a change of circumstance to be dealt with easily and efficiently.
  1. Regulates Management – shareholders have the opportunity to implement measures to prevent certain decisions being left to the discretion of the directors where they would prefer to be involved in such decisions.
  1. Controls the Transfer of Shares – a Shareholders’ Agreement can provide that where one shareholder wishes to sell their shares, the other shareholders or the company have a right to purchase the shares first. This is often a preference for small businesses that would prefer initial shareholders to retain the shares, rather than allow unknown third parties to purchase the shares and have a say in the running of the company.
  1. Restrictions – shareholders can impose restrictions on shareholders that exit the company to prevent them for setting up, working in or investing in a competing business.
  1. Death or Sickness – shareholders can agree on what happens if a key shareholder dies, falls seriously ill or suffers total or permanent disability. Such an occurrence can place severe stress on a company and there are various strategies to deal with this issue through a Shareholders’ Agreement.

If you are contemplating a new business venture or if you are an existing shareholder of a company that does not have a Shareholders’ Agreement in place, we strongly recommend that you contact us on (07) 5597 3336 or email nschulte@belllegal.com.au.

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