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Shareholder Agreement – Is It Even Necessary?

As a start-up or an already-running business, you must set clear boundaries regarding management and control. For this, you need a legally binding contract called a shareholder agreement.

Shareholder Agreement

A shareholder agreement sets the rights and obligations among the shareholders and clarifies how to operate the company. It also outlines the information regarding the management of the company, along with the privileges offered to the shareholders.

Basics Of Shareholder Agreement

No two shareholder agreements have to be the same. Depending upon the company and the law, this contract will have variations. However, here are the basic things a good shareholder agreement should include.

  • Ownership of the shares per shareholder;
  • In case of different classes of share, the separate rights and rules in accordance with each class should be included;
  • Information on how new shareholders can join the company;
  • What happens if a shareholder dies;
  • Reasons for which a shareholder may be kicked out of the company;
  • What a shareholder has to do if he wishes to leave the company, such as to whom the shares can be sold or the existing shareholders have to be offered first;
  • Rights for the minor shareholders (if any);
  • Information about the dividend policy;
  • Procedure to be followed if the company needs a capital injection;
  • Will the company issue additional shares in the future? Will the current shareholders be able to acquire them, or will their interest be diluted?

If you want to clarify some more things, you can add those to the agreement. Making changes to this agreement after it is introduced to others can be difficult. Why? Because shareholder agreements in Australia require the consent of each shareholder, and in case of alteration or changes, everybody must willingly agree.

Is A Shareholder Agreement Necessary?

Does the law require a shareholder agreement? No. Should a company have a shareholder agreement? Absolutely yes. This agreement can be highly beneficial for companies with more than one shareholder.

shareholder agreement template

You can use any good shareholder agreement template if you are confused about what to add to such a contract. You can alter it accordingly.

Here are a couple of risks of not having a shareholder agreement.

  • The primary risk is misunderstanding. Without a legal document, the shareholders may develop their perspectives, which may be far from reality. Such misunderstanding may lead to disputes that may be too difficult to resolve.
  • In case there is no written agreement, selling shares or purchasing the new one will take work.
  • If a shareholder dies, the shares will be legally transferred to their children, who may not be suitable candidates.
  • A shareholder may not do his part of the work for the company, and since there is no contract, nobody can ensure that the work will be done.
  • Without a shareholder agreement, even the person with the majority of the shares will not be given the deserved control.

Thus, it is necessary to have a shareholder agreement, even if the law does not require it. Having this contract will help you legally tackle the potential issues. Otherwise, such problems or conflicts can cost you too much.

To know more about your tax responsibilities as a business, contact Clear Tax Accountants.

Disclaimer: The information on this website is for general purposes only and should not be relied upon for making legal or other decisions. The advice provided in this article is general in nature and is not subject to the personal financial situation and needs of any individual. Clear Tax tries to keep the information accurate and up-to-date; however, you should bear in mind with changing circumstances, the accuracy and reliability of the information will not necessarily remain the same. The information is by no means a substitute for financial advice.