Answers to common questions about shareholder agreements
This article tackles some of the common questions about shareholder agreements asked by startups launching in Australia.
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.
So what's in a shareholder agreement ?
Below is a summary of the usual items in a shareholder agreement.
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
The business and management clause covers scope of business, director appointments and removals, director pay, voting, chair and shareholder reserved matters.
Accounting principles, annual budgets and plans, audits, shareholder remedies, financing of the business and access to financial information fall under budgets and finances.
Share transfers, compulsory transfers and how new shareholders can join are typically under a share transfers and registration section.
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.
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.
A dispute resolution clause helps you avoid the time and cost of formal legal proceedings.
Each shareholder will access confidential information of your startup, a confidentiality clause clarifies how that information will be kept secure.
Intellectual property includes copyright, inventions, confidential information, designs, trade marks and other creations.
A clause about intellectual property exists to protect your startup.
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 firstname.lastname@example.org or 1300 478 278 Australia wide or on +61 2 9151 7233 from overseas. We are always glad to help.
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