Joint ventures/business arrangements are commonly structured as proprietary limited companies with 2 or more shareholders.  While it may not seem essential at the start of the business relationship, having an agreement between the shareholders has a number of key benefits including:

• having a clear agreement on the rules that will govern the company/business and the shareholders’ relationship with each other; and
• ensuring that the rules about potentially difficult or sensitive matters including transfers of shares, dispute resolution and exit events are put in writing while the relationship between shareholders is amicable – this may help to avoid difficult, emotional and stressful disagreements in the future.

If you require a shareholders’ agreement, it is important that it is tailored to the shareholders, to the business, and to the future plans of the company.  The following are a few key issues to consider prior to having a shareholders agreement prepared: 

Structure of the agreement: Consideration should be given to the short to mid-term plans of the company as this may impact the terms and structure of the agreement.  For example, if it is expected that the company will look to raise funds by issuing ordinary or preference shares to parties other than the existing shareholders, the agreement should be appropriately drafted so that amendments are not required at the time of issuing those shares.   

Decision making: How will decisions of the company and the business be made?  For example:

• Will certain day-to-day decision-making powers be delegated to a CEO or Managing Director?
• What matters can be decided by the directors (and will such decisions be by majority vote (50%), special majority vote (generally 75%) or unanimous vote (100%))? 
• What matters will be reserved as decisions of the shareholders (and will such decisions be by majority vote (50%), special majority vote (generally 75%) or unanimous vote (100%))?  

Funding and share issues:

• Shareholders will need to consider how the company will be funded and whether it will be by way of debt (i.e. loans from shareholders or external financiers), equity or a combination of both.
• If additional funding is required, how will this be structured – i.e. will there be an obligation on shareholders to contribute in their respective proportions?

Transfer of shares:

• The agreement should typically include a pre-emptive rights process under which a shareholder wishing to transfer any of its shares must first offer their shares to the other shareholders (before offering them to third parties). 

• Shareholders should consider whether there should be provisions that automatically trigger a forced sale of a shareholder's shares, for example, where a shareholder:
• dies, becomes permanently incapacitated or of unsound mind;
• becomes insolvent;
• has not remedied a breach of the shareholders agreement; or
• who is also an employee, ceases to be an employee of the company. 
• Shareholders should consider how the rights of pre-emption and forced sale trigger events impact the process for transferring shares – are longer timeframes or different mechanisms required to allow existing shareholders to acquire the shares being transferred so that the existing shareholders can maintain control of the company?
• Do there need to be tag along and/or drag along rights (i.e. the ability for minority shareholders to tag along and sell their shares if a majority shareholders sells its shares to a third party, or the ability for a majority shareholder to drag along the minority shareholders by requiring them to sell their shares to a third party along with the majority shareholder)?

Employment arrangements:   

• Will any of the shareholders also be employees of the company and be required to sign up to formal executive services agreements or employment agreements, and what are the terms of those arrangements?
• Consideration should also be given to the manner in which the company (or its board) can terminate the employment of any shareholders (or their associated persons) who are also employees, and whether this should trigger a forced sale of any shares held by the employee shareholder.  

Restraints:  Restraints are provisions that protects the business if any shareholder leaves. Care must be taken to ensure these provisions are not drafted in a way that may result in them being unenforceable or contrary to law (e.g. under the cartel/exclusionary provisions in the Competition and Consumer Act 2010 (Cth)).

Resolution of deadlocks:

• Consider whether a resolution process to resolve deadlocks at board/shareholder meetings is required (e.g. where a significant decision is raised but is not passed because there is no unanimous vote or special majority vote, depending on which voting threshold applies).
• Deadlock resolution provisions could also provide that where a certain number of deadlocks occur (e.g. 3 times in 3 months), an agreed deadlock resolution process should be followed which may include mediation, a forced sale or exit, a pre-emptive rights offer, or a winding up of the company. 

If you have any questions on shareholders agreement or need a shareholders agreement prepared for your company, please do not hesitate to get in touch with one of the Sierra Legal team.