If you’re a business owner considering taking on an investing party or shareholder, some form of written shareholders’ or partners’ agreement is vital.
Use the agreement to make clear all parties’ investment and partnership intentions and responsibilities from the outset.
Remember, this is your business, so you can cover whatever you think important, from business relationships, ethics and cultural issues, to insurances, taxation and debt obligations; it’s your blank canvas.
(And if you’re already in a partnership or shareholding entity and don't have a shareholders’ agreement, it's not too late to put one in place.)
Our free checklist contains the broad components of a private company’s Shareholders’ Agreement.
A client's experience
I recently had a call from a previous client who was after advice regarding their shareholding in a young business.
They were one of three private investors in a start-up business which opened its doors a couple of years back. Each of the three parties took some shares in a Pty Ltd at the outset.
They all had a ‘day job’ or other business interests, so corporate structure and shareholder issues were far from their minds at the outset. Instead they were thinking about things like: “This is potentially a good business idea – we think it’s got legs – we all bring different strengths to the table – in some cases the idea is complementary to other things we individually do – let’s pool our knowledge and knowhow, and give it a go!”
Two years down the track the idea has become a reality. It’s been making money and growing. In fact, as a business the entity is now worth several hundred thousand dollars.
Anyhow, times change and one party (the party that approached me) now has the opportunity to increase their shareholding. We talked over value and deal terms, I provided some advice on various points, and generally the terms seemed ones that could be reasonably negotiated between the selling shareholders and the shareholder aiming for a greater share.
Then I asked the question: Do you have a shareholders’ agreement?
They said: “No, I don’t think so. It’s not something we thought about at the time. All the parties trusted each other and I guess we didn’t think it was important.
“But now, we’re increasing our stake and it’s worth something! Maybe it’s time to consider a shareholders’ agreement.”
The client then asked me if there was a checklist of things they should review and ensure were included in their agreement, which could then be used as a framework for further decision making, future exit etc. Of course my answer was 'yes' and I talked through some key aspects to consider.
Why you need a shareholders’ agreement
If you’re thinking about starting a business with someone else, or you’re an existing business owner considering taking on an investing party or shareholder, I strongly advise you to create a formal shareholders’ agreement at the outset.
I have dealt with a number of clients over the years who have found themselves in very sad and frustrating situations because they have entered into shareholding arrangements without a documented and legally well-constituted agreement.
Relationships have suffered, friendships have been lost, and business performance and value has been severely eroded through distractions caused as a result of not having an effective agreement.
In our experience, parties that do have formal shareholders’ agreements don’t always stick to the letter of the agreement, but it provides an agreed framework for negotiation.
Once you're received some sound commercial advice, and you and your partners have agreed to the key basic terms of the shareholders’ agreement, make sure you get some taxation and legal advice on the risks and issues for you and the company.
It’s also important to ensure final agreement has all the relevant bases covered in terms of notice period, and is legally well constituted.
The JPAbusiness team often provides support for clients to work through these issues and helps set the right basis for partner relationships, including:
- facilitating open planning discussions between parties, and
- drafting Shareholders’ Agreements.
If you would like support or advice regarding creating a Shareholders’ Agreement and/or assistance with shareholder and business transfer issues, please contact the JPAbusiness team on 02 6360 0360 or 02 9893 1803 for a confidential, obligation-free discussion.
James Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.