Shareholder Agreements in a Family Business Context

30 July 2015

A Shareholder Agreement is a document which governs the conduct, rights and responsibilities of shareholders and directors of a company. 

How directors are appointed to the board, how they can be removed, how decisions are to be made, how and when meetings of directors and shareholders are to take place and how a shareholder can sell or transfer his or her interests are all issues typically dealt with in Shareholder Agreements.

In the context of a family business, Shareholder Agreements (and unit holder agreements where the business or family assets are owned by a unit trust) can also provide certainty around issues in relation to succession of directors on the board, ensuring successive family representation on the board and ensuring mechanisms are in place to preserve the business, its assets and the integrity of the decision making process.

When thinking about preparing agreements of this nature, there are many issues to consider, including but not limited to the following:

Shares and Shareholders

•           Who will be the shareholders? How will shares be held?

•           Are any of the shares held on trust?

•           Quorum for shareholders' meetings

•           Voting rights at shareholders' meetings

•           Dividend policy

Grounds of Termination

•           Can a family member or group be directed to exit the structure or can it exit voluntarily?

•           What will the triggers for exit of a shareholder (if any) or the termination of the office of director be: for example, bankruptcy and insolvency or conviction of a party for a serious criminal offence.

Transfer of Shares

•           Succession

•           Death, permanent disability of directors

•           Insurance requirements and Buy/Sell arrangements

•           Will shares or the office of director be able to be held by a spouse or other non-family member?

•           Pre-emptive rights

Directors

•           Number and mix of directors (executive vs independent)

•           Chairperson of Board (if any)

•           Voting rights at directors' meetings

•           Appointment and removal of directors by shareholders 

•           The succession of family representatives on the Board

•           Procedure to resolve deadlocks

When seeking advice in relation to the preparation of a Shareholder Agreement, it is important your legal adviser understands your family’s overall long term plan for the business so that the Agreement facilitates appropriate governance mechanisms to ensure that the decision making around the operation of the business and its income and assets are dealt with in the context of what your business and your family need.