Thinking of exiting? Check your shareholders agreement


Posted By and on 12/02/20 at 12:09 PM

If you are considering exiting your shareholding in a private company, experience tells us that having a well drafted shareholders’ agreement paves the way for a more certain exit.

A shareholders’ agreement is a binding contractual document that regulates the rights and responsibilities of shareholders. But, one size does not fit all! Shareholders’ agreements, like any other key contract, should be tailored to suit the company and its owners to provide for the smooth functioning of the company and its business, which includes an orderly process if a shareholder wishes to sell their shares.

What do I need in my shareholders’ agreement?

A shareholders’ agreement will generally set out:

  • the rights of each shareholder to board representation;
  • the power and procedure for critical business decisions to be made;
  • the rights of shareholders to company information;
  • the rules that govern the conduct of board and shareholder meetings;
  • the process to resolve deadlocks and other disputes;
  • the process for the company to seek further funding (both debt and equity); and
  • the process a shareholder must following to transfer its shares (including in situations of a default).
Shareholders Agreement
The benefits of a well drafted shareholders deed

We recently acted for the majority of the shareholders (including the founding shareholders) of a start-up technology company in selling their shares to a global competitor.  The sale process was tracking along smoothly until a minority shareholder (and former executive) put a spanner in the works and refused to sign the sale agreement.

Luckily, when we consulted the shareholders’ agreement, there were appropriate provisions included to deal with such a situation. In particular, the shareholders’ agreement included:

  • a pre-emptive right:  requiring shareholders to offer their shares for sale to other existing shareholders before to a third party
  • a drag along right:  to compel a minority shareholder to sell with the majority; and
  • sale to third party provisions:  governing the process and requirements of approving a purchaser and the sale itself.

These clearly drafted provisions provided an avenue for the majority of shareholders to exit on the terms negotiated with the buyer and provided the buyer with several options to purchase the remaining shares of the minority shareholder.

What could have happened?

Without a shareholders’ agreement in place that includes such provisions, there are limited avenues in which minority shareholders can be forced to sell along with the majority.  If your purchaser wants to acquire 100%, one stubborn minority shareholder might mean the deal is off!

While the Corporations Act 2001 (Cth) includes general compulsory acquisition powers, these powers are rarely used and there is limited judicial authority or practical guidance as to how those provisions apply in practice. A potential buyer may also be reluctant to rely on a general compulsory acquisition process which could further delay a sale (and increase costs and stress levels for all involved).

Key takeaways
  • as owners come and go, a shareholders’ agreement needs to be reviewed and updated to ensure that it continues to be appropriate for the particular company and its circumstances;
  • consideration must be given to whether securities granted to an executive lapse or are otherwise able to be bought back by the company when the executive exits, particularly in less than amicable circumstances; and
  • a well drafted shareholders’ agreement should include the granting of appropriate authorities and powers to ensure that shareholder obligations can be exercised in an efficient manner in circumstances where a shareholder fails to do so.

KHQ’s Corporate & Commercial team prides itself on ‘walking the path’ with its clients and supporting them to reach important capital raising and exit milestones. We also have significant expertise in drafting shareholders’ agreement for a range of companies in a range of industries. If you have any questions about whether you should have a shareholders’ agreement or your shareholders’ agreement is air-tight, please don’t hesitate to contact us on +61 (0)3 9663 9877.

Kate Landells Special Counsel

Kate is a Special Counsel in our Corporate & Commercial team.

Kate supports clients to build value, achieve key milestones and drive exit outcomes.  She has extensive experience across a... Read More

Koula Politis

Koula Politis Senior Associate

Koula is a Senior Associate in our Corporate & Commercial team.  She has extensive experience spanning a range of corporate and commercial matters, with particular expertise in mergers and acquisitions,... Read More