Shareholder agreements: a simple guide for startups

By Vivian Michael | Shares

Shareholder agreements - a simple guide for startups

Answers to common questions about shareholder agreements

This article tackles some of the common questions about shareholder agreements asked by startups launching in Australia. 

So what is a shareholder agreement ?

Simply, a shareholder agreement set out the rights and responsibilities of shareholders. 

Importantly, a shareholder agreement is not the same as a share sale agreement.

A share sale agreement outlines the terms of a share sale such as how much an investor will pay for shares, the share class and when legal ownership will pass to the buyer, this agreement does not always go into detail about shareholder rights.

What's in a shareholder agreement ?

So what's in a shareholder agreement ?

Below is a summary of the usual items in a shareholder agreement. 

1. Share class rights 

Each shareholder can be given a different class of shares. 

And each class of shares can have different rights attached like the ones in the example below. 

Example Share Class

Example Share Class Rights

A

  • Attend and vote at all meetings, one vote for every share held and on every poll one vote for every share held;

  • Participate in dividends; and

  • Repayment of capital and share in the division of surplus assets or profits of the company on winding up of the company.

B

  • Attend and vote at all meetings, one vote for every share held and on every poll one vote for every share held;

  • Fixed non-cumulative preferential dividend at the rate of 7% per annum on the capital paid; and

  • On winding up of the company, a right to repayment of capital. There is no right to share in the profits or assets of the company.

C

  • The right to participate in dividends;
  • No voting rights; and
  • Repayment of capital. They do not carry the right to share in the profits or assets of the company on winding up. 

2. Business and management

The business and management clause covers scope of business, director appointments and removals, director pay, voting, chair and shareholder reserved matters. 

3. Budgets and finances

Accounting principles, annual budgets and plans, audits, shareholder remedies, financing of the business and access to financial information fall under budgets and finances.

4. Share transfers and registration

Share transfers, compulsory transfers and how new shareholders can join are typically under a share transfers and registration section.

5. Tag along and drag along rights

Tag along rights benefit minority shareholders. This means minority shareholders can join a sale. For example, if a majority shareholder is selling their stake.  

Drag along rights mean that a if a majority shareholder sells their stake, the prospective owner can force the minority shareholders to join the sale. 

Both rights are usually included in a shareholder agreement. 

6. Material breach

A material breach clause states what happens if there is a breach of the shareholder agreement. Usually, shareholders are given a notice period to fix any breach.

Voting rights can be suspended, a forced transfer of shares and compensation may be payable to the other shareholders impacted by the breach. 

7. Dispute resolution

A dispute resolution clause helps you avoid the time and cost of formal legal proceedings.

8. Confidential information

Each shareholder will access confidential information of your startup, a confidentiality clause clarifies how that information will be kept secure.

9. Intellectual property

Intellectual property includes copyright, inventions, confidential information, designs, trade marks and other creations. 

A clause about intellectual property exists to protect your startup.   

10. Deed of accession

Adding a deed of accession to your shareholder agreement will be cost effective in the long run. 

So what is a deed of accession ? It's a deed that says any new shareholder agrees to the terms of the shareholder agreement. So this means, usually the shareholder agreement does not have to be revised to include the new shareholder. 

Do you need help from an Australian business lawyer for startups? Contact us today for help on info@michaellawgroup.com.au or 1300 478 278 Australia wide or on +61 2 9151 7233 from overseas. We are always glad to help.





About the Author

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to startups that would otherwise DIY, rely on legacy contracts or go without.

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