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Why do I need a Shareholders’ Agreement?

By Dan Wignall and Jodie Graham16 Oct 2015

Going into business is like going into marriage … no-one likes to think it won’t last; but inevitably, like marriage, many business relationships don’t last for one reason or another. And when that happens, things are far less complicated if there is an agreement in place setting out the mechanisms for getting out.

Now, not all business relationships are doomed to fail through fault or a breakdown in the relationship. What about unforseen circumstances? What if your personal circumstances change and you are required to relocate; or for medical reasons you cannot maintain your position; or another more lucrative opportunity presents itself and you can’t do both; or your financial circumstances change such that removing yourself is the only option for your family?

Let’s talk about an all too familiar situation. You and your best mate Pete decide to set up a business. A company is incorporated to run the day to day business and you each have a 50% shareholding (held either beneficially or otherwise) in the company. You each contribute equally towards start-up costs. You are both appointed as directors and each have identifiable roles within the business. Everything is split down the middle and, being best mates, everything runs smoothly. It’s a small local business and everything is going as planned.

But then something happens. You can’t maintain your role in the business; you’ve got to relocate your family to the other side of the country. Pete can’t run the business by himself, and you can’t maintain your role remotely.

What do you do?

The answer is that you look to the Shareholding Agreement you and Pete put in place at the commencement of your business relationship. A good Shareholding Agreement will contemplate unforeseen circumstances, not just the advent of irreconcilable differences.

As you and Pete had taken the time to implement a Shareholding Agreement, you are able to extract yourself from the company and the business, while all the while not destroying your friendship with Pete. You still visit him at Christmas and joke about the good old days.

Let Hynes Legal help you put together a Shareholders Agreement tailored to your needs. Even if things are already ticking along, we can still assist; it’s not too late.

In any event, some questions you should ask yourself include (although not an exhaustive list):

  • Will the remaining shareholder/s have first right of refusal to purchase the departing shareholder’s shares? 
  • Can a third party purchase the departing shareholder’s shares?
  • Will the remaining shareholder/s have any say in the third party purchasing the departing shareholder’s shares?
  • Will there be an automatic transfer of shares to the remaining shareholder/s upon departure of another shareholder?
  • How will the value of the departing shareholder’s shareholding be calculated?
  • What happens if the shares are not worth anything at the time of departure?
  • Does the departing shareholder get back any initial contribution?
  • Are initial contributions paid back at a certain time?
  • Will the company continue to maintain a directors’ indemnity insurance policy for departing directors?
  • How do we terminate the business altogether?
  • What are each shareholders’ voting rights?