• Mitchell Walmsley

The importance of implementing a shareholders’ agreement

This is a guest blog written by Aaron McDonald from Pragma Law

During the initial stages of setting up a business, partners usually trust one another and have exciting plans for the future. Something that is often overlooked during this stage is what should happen if (or when) disagreements, conflict or misunderstandings arise in the future. These are important considerations that should be given careful thought from the outset.

One way to address the potential of future conflict or misunderstanding between business partners is with a shareholders’ agreement.  As the former Chief Justice once said: “an ounce of prevention is worth a pound of cure”. A shareholders’ agreement is an agreement made between shareholders which helps to govern the operation of a company. These agreements are important to have in place to ensure that a company continues to run smoothly well into the future. Some of the key components of a common shareholder’s agreement are discussed in more detail below.

Dispute Resolution

At the core of most shareholders agreements are provisions relating to what should occur when a dispute arises between business partners. This assists with providing clarity and certainty in the event of disputes between business partners.

Right of Pre-Emption

A shareholders’ agreement will commonly contain clauses that give rise to a right of pre-emption. In this context, a right of pre-emption means that if a business partner wishes to sell their shares in the business, they must first offer them to the other existing business partners. This is important in giving business partners some say in who they stay in business with.

Restraints of Trade

Restraint of trade clauses are commonly incorporated into shareholders agreements. These help to protect the goodwill of the company and prevent employees or partners who leave the company from competing with the company or taking the company’s clients. This can help to prevent further disputes arising between business partners if one decides to leave the company.

Confidentiality

Confidentiality clauses are an important feature of most shareholders agreements. This clause should clearly set out what constitutes confidential information and create an obligation on all shareholders that confidential information remains confidential. This obligation normally persists even after a shareholder ceases to be a shareholder of the company.

Ongoing Funding

A well drafted shareholders agreement will usually contain provisions that deal with the funding requirements of the company. More specifically, these clauses help to create equitable mechanisms for sharing funding obligations among shareholders.

If you have any questions about shareholders agreements, Pragma’s team of specialist lawyers can assist and be contacted at hello@pragma.law (or myself directly on aaron@pragma.law) or on (08) 6188 3340