Another episode in the Q&A video series for SME’s and business leaders.
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Intro: I’m Stuart Ayling. Thanks for joining me on yet another episode of Vectis Q&A and in this episode I’m speaking with Helen Kay, commercial lawyer and Partner at Creevey Russell Lawyers. We’ll be looking at what a shareholders agreement is all about, who it’s for, and how it can protect you.
Stuart: For this episode of Vectis Q&A I’m pleased to have Helen Kay with me as my guest. Helen is a commercial lawyer and partner at Creevey Russell Lawyers and she’s passionate about helping business owners avoid unnecessary risks in commercial contracts. So thanks for being with me on this episode Helen.
Helen: Thanks for having me Stuart, it’s a pleasure.
Stuart: Ah look, no, the pleasure is all mine. Look the first topic that we need to cover is about shareholders agreements. Why is it important that a business have a shareholders agreement in place? And maybe, start off by explaining what is a shareholders agreement and then why is that really important?
Helen: First of all, it’s really important if you’re in partnership with somebody. And with business partners I’m talking about the actual owners of the business, that is the owners of the business that need to enter into a shareholders agreement.
The shareholders agreement basically sets the rules and guidelines but how the company is going to operate. So if a certain issue arises the rules are covered in that agreement.
The beauty of that is you enter into these agreements when you’re friends, when you’re excited about a new business venture, and not when one of you may be disgruntled and trying to seek to rely on a clause.
So you’ll both go into it with open eyes. Let’s say both, most shareholders agreements we do are between two people going into business together, but you know even bigger businesses can enter into shareholders agreements, and really should do.
Stuart: OK so, when you say going into business together is this, is a shareholders agreement discussed and put into place after a business entity is created? Is that when this should be done in an ideal world?
Helen: In an ideal world yes. In an ideal world it should be part of your startup package. So if somebody came to us for example and said we’ve got his great business idea, we found some premises, what do we do?
We’d help them structure how they should set themselves up in business. More often than not that would be as business owners, an incorporated company. Therefore they would be shareholders and directors. And at the same time as we’d be processing everything through ASIC to get them set up, we would also be talking to them about what they need to put in the shareholders agreement. Ideally that would be done very very closely together. Realistically from a cash flow perspective it might be that they do it a little bit further down the track.
Stuart: Yeah, OK so from your professional legal perspective getting this done as soon as possible is the goal.
Stuart: OK look something I just want to clarify as well, you were talking about business partners and I suppose people might get that that picture pretty clear, if they’re going into partnership with someone. But often within a business there’s other stakeholders involved as well, maybe from the investment side, or that sort of thing that aren’t maybe official partners in the business. So, who does a shareholders agreement actually protect?
Helen: The shareholders agreement needs to be entered into between the the owners of the business. These are the people who hold the shares in the business and have a vested interest in the success of the business, is the best way to describe it Stuart.
These are the people who put money in. They’ve put their blood, sweat and tears into it and the potential that if this business works, which hopefully it will, they’ll make money from it.
However if things go wrong, or if they have a bad a few months they’ll also be responsible for their share of any debts. It’s those people the business owners, the shareholders, who have to enter into an agreement, which we call a shareholders agreement. If they’re in a partnership which is similar but not recommended for a number of reasons, they would enter into a partnership agreement which would have similar types of provisions in there for how they can transfer shares etcetera.
Stuart: Yeah that’s right but just, um, certainly a lot more protections from an individual perspective if they’re going into a company structure rather than a partnership structure, so I guess the shareholders agreement is equally important in either situation.
Helen: Absolutely. Like I say, it’s the set of rules. It’s the document that you tailor to suit your business, your business partners, everything that you’ve come up with how you want company run gets documented.
It then gets kept with the important company documents and only when issues arise, if somebody wants to leave the business and sell their shares, or there’s a dispute or a deadlock, do we then pull that agreement out and start looking at it’s terms.
Stuart: OK now, we’ve been talking about the shareholders agreement but can you tell me, or maybe best thing, give me some examples of what is actually covered by a shareholders agreement.
Helen: Good question Stuart. Like I said these documents are tailored for the individual companies but there are standard clauses, standard clause headings that would guide you on what needs to go in.
It’s absolutely crucial that things like transferring shares, so the rules on when somebody wants to leave their company, that that is documented. The fact that the existing owners would want to have the first right of refusal on those shares, how they would be valued, the process of serving notices and the time period.
Because somebody might be leaving because they need the cash, so it has to be quite fair in terms of the existing shareholders being able to find the cash and the exiting shareholder being able to get hold of the cash. And then the process if they don’t want to take the shares, you know, how you can go to a third party and how that third party would be vetted.
So those are probably the most important clauses. We’ve already touched on deadlock and dispute resolution, absolutely crucial that rules are set at the outset of decisions are to be made and how disputes will be resolved if they arise. And then just all the general day-to-day stuff, how directors are appointed, how meetings are to be held, whether there are any restraints on shareholders and operating competing businesses and soliciting clients etcetera.
Stuart: OK so as you say it’s a pretty comprehensive set of rules about how the how the business is actually managed. Now with that in mind is it possible for this, the comprehensive shareholders agreement, to actually get in the way or restrict things which are done within the business because I can imagine some business owners or or shareholders may be thinking well that’s great but what if we want to do something a different way, or what if we change our mind and we think well we want to do something different on this occasion. How does a shareholders agreement allow for that sort of flexibility?
Helen: OK, so I guess you’ve got to really think ahead when you prepare a shareholders agreement. Think, what’s going to happen in this business over the next few years. So for example if you do have an older shareholder who wants to slowly exit from the business you need to communicate to your lawyer to make sure that they build that mechanism into the agreement.
And also as things change, you know, maybe somebody leaves, or maybe we get more shareholders onboard. As that business moves you need to constantly be reviewing these agreements.
And if you’re working with a good commercial lawyer who has become a trusted advisor to your business then they will pick up on these things when you come to them and say, you know Sam’s selling out, Tom’s going to buy, and he’s going to be the majority. That should twig that the shareholders agreement that was entered into in the beginning now needs tweaking and that there’s mechanisms in there that the parties can agree in writing to vary the shareholders agreement. So it is a moving beast Stuart.
Stuart: OK excellent. Well look, we’re just about out of time for this particular episode and thanks for explaining about shareholders agreements in a bit more detail I think all that makes good sense.
Just before we finished up, do you have any tips or I suppose or any suggestions on things which are often overlooked or maybe things which aren’t properly covered in shareholders agreements? Are there a couple of things you could mention that people should keep in mind?
Helen: Probably not not things being overlooked in shareholders agreements. The two things I see is that an issue arises between shareholders and they come to me and I say “Can you send me a copy of your shareholders agreement” and they don’t have one.
Which then means we need to go back to the constitution that was prepared as part of package when maybe the accountant set up the business. So it’s not tailored to the business. It’s just a real standard constitution so it might not have the clauses that would help us. And then also the Corporations Act which has some replaceable rules for people who don’t have constitutions. So it’s not as good as having a shareholders agreement.
And then secondly it’s the have-a-go-lawyers who maybe just cobbled one together that they found online. Which again might not necessarily do the job, and in that case it it might actually hinder things that they’re trying to do now because it wasn’t the correct document to have entered into.
Stuart: OK excellent. Well look thanks for those extra tips there Helen. So once again Helen Kay from Creevey Russell lawyers, thanks for your time.
Helen: Thanks for having me Stuart.