What do Shareholders’ Agreements protect against?

A Shareholders Agreement is a contract that attempts to regulate the rights and obligations of Shareholders or Members (used interchangeably) in the context of their ownership of securities in a Company.

Shareholders Agreements are not compulsory like the Replaceable Rules or a Constitution as required by the Corporations Act 2001 (Cth) (Act).  On incorporation or usually when obtaining an investor, many Companies choose to regulate the rights and obligations of Members in addition to regulating various aspects of the management of the Company by preparing and executing such an Agreement.  Most importantly, majority investors can use Shareholders Agreements to limit the possibility of Greenmailing.

Used carefully, they can be effective to ensure that all Shareholders (majority and minority) and the Directors understand their rights and obligations in attempting to create and build Shareholder value.

What is Greenmailing?

Greenmailing is generally thought to refer to the actions of minority Shareholders in demanding a price for their shares that is above a fair value. Note that legislation has been enacted to limit Greenmailing in the context of public Companies. In the context of Pty Ltd Companies, this definition can be broadened to include any sort of action by a minority Shareholder to take advantage of their position where their consent is required for any particular action by the Corporation.

Items that may be included in a Shareholders’ Agreement

The nature of a Shareholder Agreement means that innumerate options are possible, however they may include provisions such as:

  • meeting procedures for Directors – how meetings are convened and how the Company is to managed on a day to day basis;
  • objectives of the Company – attempting to limit the business activities of the Company to prescribed areas;
  • confidentiality obligations;
  • drag along rights – the requirement for minor Shareholders to sell their shares if a majority Shareholder decides to sell their shares to a bonafide purchaser;
  • restraint of trade;
  • non-dilution of a particular Member – provisions requiring a particular Member’s interest to be maintained at the expense of others;
  • dispute resolution procedure – options for alternative dispute resolution and mediation at first instance prior to commencing litigation;
  • dividend distribution policy – the level and manner in which dividends are to be distributed;
  • financing policy – the rights and obligations of the Shareholders in the event that debt funding is required;
  • operating procedures and approvals – for any part of the Company’s operations from budgeting and accounting to the way in which Directors meetings are conducted and minutes recorded;
  • rights to appoint Directors – a Shareholder’s right to appoint Directors and the number of Directors;
  • pre-emptive rights – to acquire another Members shares in the event that one Member wishes to sell (for whatever reason);
  • tag along rights – the right of a minority shareholder to ‘tag along’ with a majority shareholder if the majority shareholder sells the securities a third party;
  • terminating events – a pre-existing agreement for the Members to sell their shares if certain events such as death, trade sale, an initial Public Offer is made to the Company to list on the Australian Stock Exchange (ASX);
  • valuation requirements – should one Shareholder wish to sell their shares;
  • voting – in certain situations involving major decisions of the Board of Directors and the Shareholders and general meeting;
  • warranties – made by the Shareholders prior to entering into the Agreement;

This rich tapestry of rights and obligations (which is by no means exhaustive) must be considered in light of the interests of the party to which the document is to be prepared and the overall circumstances of the Company.

In preparing a Shareholders Agreement the drafter should ensure that:

  • none of the provisions are inconsistent with the Company’s Constitution;
  • the provisions do not attempt to contract out of the Corporations Act 2001 (Cth);
  • the proposed share capital structure is considered in light of the controls and decision making thresholds that are proposed; and
  • the proposed agreement is not oppressive to minority Shareholders.

A well thought out Shareholders Agreement can be effective against the Greenmailer.

Further references

Related articles

What is a Shareholders Agreement?

Tag along rights in shareholders’ agreements

Shareholders’ agreements and inconsistency clauses

Top 7 mistakes made in Shareholders’ Agreements

Tailored Constitutions vs Shareholders’ Agreements

Further information

For further information on how Dundas Lawyers can assist your company, please contact:

Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Telephone: (07) 3221 0013
Facsimile: (07) 3221 0031
Mobile 0419 726 535

Disclaimer

This article is general in nature and cannot be regarded as legal advice.  It is general commentary only. You should not rely on the contents of this article without consulting one of our lawyers. If you would like advice regarding how the law applies to your individual circumstances, then please contact one of our legal practitioners.

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