Shareholder Relationships

Are you going into business with someone? Or are you a business owner who is looking to bring on additional shareholders?

If the answer to either of these questions is yes, you should consider whether a shareholder agreement is right for you.

Do I need a Shareholders’ Agreement?

The best way to think about a Shareholders’ Agreement is a document that sets out both the way you want the business is to be run on an ongoing basis and what would happen if a shareholder wanted to leave or if there is a breakdown in relationship between shareholders - a bit like a pre-nup, but for your business.

This will be especially important if you are a small business owner who is considering adding extra shareholders into the mix, for example as way of keeping your employees within the business by offering them a share of the business, or as part of a merger with another business.

Do I have to have one?

No. But it is a good idea to ensure that everyone is on the same page regarding the management of the business. If you’ve ever had to deal with a relationship breakdown, you’ll know how quickly things can deteriorate.

Doesn’t the Company’s constitution address all of this?

Not all of it, and not in a private manner.

If you do not have a shareholders’ agreement, the default rules under the Companies Act will apply to the way you run the company. Founders often feel that these default rules do not align with how the company should operate. For example, the default position under the Companies Act is that:

shareholders can transfer their share to anyone, even a competitor; and
there is no restriction on shareholders actively competing with the company.

Likewise, minority shareholders often feel that the default rules do not provide them with sufficient influence within the company. For example, the default position is that:

a majority of shareholders may appoint and remove directors. So, if you own less than 51% shares in a company you do not have an automatic right to appoint the people who will be managing the affairs of the company. Similarly, you do not have an automatic right to remove any director from the company.
if you own less than 25% of the shares, you will have no automatic right to veto certain decisions of the board, in particular:
1. to approve decisions of the board that involve the company entering into arrangements, the value of which are more than half the value of the company’s assets (these types of transactions are formally known as “major transactions”);
2. to adopt, alter or revoke a constitution;
3. to amalgamate the company; and
4. to put the company into liquidation.

So what does the constitution do then?

A constitution is a useful document as a company can only legally do certain things if it’s constitution specifically says it can, for example:

having different rights attached to different classes of shares;
obtaining liability insurance or providing an indemnity for its directors or employees;
signing deeds otherwise than in accordance with the Property Law Act;
purchasing its own shares; and
allowing directors to act in the best interest of a parent company.

Privacy

Unlike a constitution, which must be registered on the Companies Register (and is therefore publicly available), a shareholders’ agreement is a private document that is kept among the parties to that agreement. Where shareholders wish to stipulate certain actions of a company, for example a dividend policy, but don’t want that information to be publicly available, a shareholder’s’ agreement is a good way to achieve this.

What should I expect to see in a Shareholder Agreement?

There are no set rules regarding what can or can’t be included in a shareholders’ agreement, however it is common to see provisions addressing the following:

The type of business the company can undertake.
How the board of directors is appointed.
How decisions are made.
How shares can be issued and sold.
Restrictions on anticompetitive behaviour
How disputes will be resolved.
The company’s policy regarding the payment of dividends
What rights the shareholders will have company information.

But I have a partnership – not a company!

Don’t, worry! We can help with this as well. Despite being different corporate entities Partnership and Limited Partnership agreements typically deal with very similar matters to those you would expect to see in a shareholders’ agreement.

Easy to understand pricing

While it is difficult to provide an accurate estimate without fully understanding the scope and complexity of the work, in our experience work involving a shareholders’ agreement typically costs in the region of:

preparing a new shareholders’ agreement - $1,750 - $3,000 + GST and disbursements.
providing advice and assistance regarding a shareholders’ agreement that has not been prepared by us - $500 - $2,000 + GST and disbursements.

Please note that if you are preparing a shareholder’s agreement as part of a wider transaction there may be additional costs involved (i.e. share sale agreements, constitutions).