In the realm of business, a shareholders agreement serves as a crucial compass regulating the relationship between a company and its shareholders and the management of the company and its affairs.  Yet, the misconception lingers that this agreement is a mere formality, a quick-fill template. In truth, the creation of a valuable shareholders agreement demands meticulous deliberation and purposeful tailoring. While certain issues and themes may be ubiquitous, no two agreements are likely to address them all in the same way.

The nature of the issues to be dealt with in a shareholders agreement (and how they are addressed) will depend on factors such as:

• the purpose, size, and nature of the company and its business;
• the extent to which shareholders are to have the right to be represented on the board of the company, and to control or influence decisions with respect to its business; and
• whether particular shareholders (either personally, or while they hold a specified percentage of shares) have reserved or special rights, such as the right to veto particular decisions or to drive a sale of all of the shares or the business of the company.

As an example, in the case of a company which has 2 or 3 equal shareholders who work in the business, the following are likely to be paramount considerations in the drafting of a shareholders agreement:•

• the need to ensure that all shareholders have an equal say in the running of the company (eg, by each shareholder having the right to appoint their nominee as a director of the company);
• how any deadlocks in decision-making will be resolved;
• what is to happen when a shareholder wishes to sell their shares in the company; and
• how the death and/or total and permanent disablement of a shareholder (or their associated person) is to be handled.

By contrast, the key issues to be addressed in a shareholders’ agreement for a company that has a broader and more varied shareholder base will be different and potentially more complex.  Such a company may, for instance, have a founding shareholder or shareholders, shareholders who are professional investors (such as private equity and institutional investors), and/or employee shareholders, with different shareholdings.  The key issues for a shareholders agreement for this kind of company may include:

• shareholders’ rights to appoint nominees to the board of the company, which may be contingent on a shareholder holding a minimum percentage of shares;
• whether material decisions will require the approval of a specified majority of directors or shareholders;
• whether ‘tag along’ rights are to be conferred on shareholders.  Generally speaking, a ‘tag along’ right is triggered where a majority shareholder (or group of shareholders holding a specified majority of shares) receives a third party offer to buy their shares which they wish to accept.  The inclusion of ‘tag along’ rights in the shareholders agreement mean that the majority shareholder will only be able sell their shares to the third party if they arrange for the third party to make a similar offer to buy the shares held by all of the other shareholders;
• if ‘drag along’ obligations should be imposed on shareholders - where a majority shareholder wishes to accept a third party offer to buy their shares, drag along obligations can force other shareholders to also sell their shares to the third party, at the same price and on the same terms; and
• what type of exit mechanisms should be included – exit mechanisms typically allow a majority shareholder (or group of shareholders holding a specified majority) to require the company (and, where applicable, all shareholders) to undertake a sale of the company’s business or shares, or an initial public offering and listing of the shares on ASX or another securities exchange.

To prepare a relevant and workable shareholders agreement, it is necessary to consider the particular circumstances of the relevant company, its shareholders, and their needs.  For a company with a small shareholder base, the shareholders agreement may focus on fundamental rights and protections that apply to all shareholders equally. With a complex or large business, and/or shareholders with different holdings of shares and different interests, it becomes critical to identify and address the objectives of particular shareholders, their needs in terms of the degree of control they wish to have over the company, and the nature of any special or reserved rights they may require.  

In the course of drafting a shareholders agreement, there are likely to be negotiations between shareholders (particularly where there are majority and minority shareholders), so that a balance (or compromise) is reached. A lawyer who is experienced in drafting and negotiating shareholders agreements will be able to identify key issues relevant to the company in question, and should be able to propose options for addressing those issues in the agreement.

The specific provisions and issues to be addressed in a shareholders agreement will always depend on the unique circumstances and objectives of the company and its shareholders. All of this goes to show that the oft-repeated line that ‘a shareholders agreement is just a standard document’ is really just a myth.

If you need a shareholders agreement prepared for your company, or advice on one, please contact the Sierra Legal team.