What is a shareholder agreement?

Properly drafted shareholders agreements provide a clear framework of agreed principles across a range of issues. The owners of a business operated by a company should execute a shareholders agreement as soon as possible and preferably before commencement of trade.

Shareholders agreements provide various benefits throughout the establishment and operation of a business, covering important issues such as who can be a shareholder, who can serve on the board of directors, how company shares are valued, and critically, how shareholders buy and sell their shares. Whilst not mandatory, written shareholders agreements often become a beneficial tool to avert expensive disputes when disagreements arise.

The importance of an exit clause

Although at the commencement of a business it may be unnatural to contemplate the exit of current shareholders, it is inevitable that such an event will eventually occur.

Shareholders Agreements should set out a general exit strategy including how shareholders are to be bought-out, how the business or shares are to be listed for sale, and how value is attributable to each share.

There are a number of different types of valuation methods available,which can be utilised for a successful exit. Commonly used methods of valuation include an agreed value, a predetermined formula, or determination by an independent expert.

An Exit arrangement is a complex issue and requires careful drafting. Important issues to consider when drafting include:

  • Should the parties have a right to simply sell shares at their will?
  • Should there be a minimum time that the parties should hold shares before a sale is permitted?
  • How should the assets of the business be dealt with upon a winding up?
  • Can there be a possibility of a party insisting on retaining certain assets after a winding up?
  • At what value should one party buy out another?

For advice on drafting a shareholder agreement and the importance of exit clauses, please contact our office on (02) 9525 8688.