Starting a new business or purchasing an existing business is an attractive and exciting prospect for many people. While the focus of any business plan tends to be on the positive potential for the business, it is also important to plan for any unexpected events that may occur. What if, for example:
- A shareholder wants to leave the business;
- A shareholder is unable to contribute to the business due to injury or death;
- The shareholders are unable to agree on vital issues.
These things can and do happen and so it is always important to discuss and agree a plan of action for these types of events before jumping into any business. One very effective way of creating some certainty for these uncertain events is to have a shareholder’s agreement in place. A shareholder’s agreement regulates the rights and obligations of the shareholders and it can help avoid costly court litigation which may result when things don’t go to plan.
What’s in a shareholder’s agreement?
Every business is different and so each shareholder’s agreement should be tailored to the specific needs of the business and the individual shareholders. At minimum, your shareholder’s agreement should include the following basic provisions:
- Alternative Dispute Resolution. This usually requires the shareholders to try and resolve their disputes through an alternative dispute resolution process before launching into costly and protracted court litigation. This may include mediation, arbitration or conciliation.
- Deadlock Provisions. This outlines what procedures will be used to resolve situations when shareholders cannot agree upon major business issues.
- Pre-Emptive Rights. Pre-emptive rights impose certain restrictions on the transfer of shares. Pre-emptive rights may include a right of first refusal, a right to refuse any share transfer or a requirement that consent from the board is obtained first.
- Mandatory Sale Events. These are usually specific fundamental events which will trigger a mandatory share sale. Examples of such events include death, incapacity, insolvency or material agreement default.
- Share Valuation Methods. This is a method used for determining the value of shares, if required. This may include fixed price valuations, asset based valuations or expert determination.
Things don’t always go to plan but you can always plan ahead for unforeseen events. Shareholder disputes can be very expensive but the initial expense of preparing a comprehensive shareholder agreement for your individual business will pale in comparison to the cost of litigation.
Last Updated: 23 June 2016
Article by Richelle Cuthbertson, Compete Contract Solutions Pty Ltd