Two former classmates each own half of a renovation company. After five years, one wants to expand and the other wants to scale back, and from then on no decision can be passed and the bank account, which needs both signatures, is frozen. This kind of 50:50 deadlock is common in companies owned by friends, relatives and couples. The answer is to sign a shareholders' agreement while relationships are good, setting out in advance what happens if you disagree, someone wants out, a marriage breaks down or a shareholder dies. Without one, the dispute often ends up in court, which is expensive and slow.
At a glance
- The constitution governs how the company runs internally; a shareholders' agreement is a more detailed private contract between shareholders, and the two should be consistent.
- Deadlock can be resolved through escalation, mediation, an independent director, expert determination or a buy-sell mechanism.
- The agreement should cover pre-emptive rights on share transfers, the valuation method and payment terms.
- Death, incapacity, leaving the business and divorce each need specific provisions.
- With overseas shareholders, agree the governing law, dispute resolution method and which language version prevails.
1. Constitution versus shareholders' agreement
An Australian company can operate under the replaceable rules in the Corporations Act 2001 or adopt its own constitution. These mainly deal with procedural matters such as appointing directors, general meetings and issuing shares. A shareholders' agreement is a contract among all shareholders and can deal in more detail with funding obligations, dividend policy, who runs the day-to-day business, which major matters need unanimous approval, and exit arrangements. The agreement should state which document prevails if they conflict, and require shareholders to cooperate in amending the constitution.
2. Breaking a deadlock
Common deadlock mechanisms can be used in combination:
- Escalation: first a directors' discussion, then the shareholders themselves meet within a set time.
- Mediation: a neutral third party helps the parties reach a solution, confidentially and at lower cost.
- An independent director, or a casting vote held by a rotating chair.
- Expert determination: an independent accountant decides valuation or accounting questions.
- A buy-sell (“shotgun”) clause: one party names a price, and the other must choose either to buy or to sell at that price, which encourages a fair offer.
Without any mechanism, a shareholder may have to apply to court under the Corporations Act for relief from oppressive conduct, or seek a winding up on the “just and equitable” ground. Courts have wide powers, but the process is expensive and, for a small company, often not worth the cost.
3. Exits and share transfers
The agreement should provide that when a shareholder sells, the others have pre-emptive rights; how the price is set, for example by an independent valuer using an agreed method, and whether a minority holding is discounted; and whether payment can be made in instalments. It can also include drag-along rights, so a majority selling all its shares can require the minority to sell too, and tag-along rights, so the minority can sell on the same terms. For shareholders who work in the business, the agreement can distinguish a “good leaver” from a “bad leaver”, with the latter's shares bought back at a lower price, together with a reasonable restraint.
Death and incapacity are the situations most often overlooked. If a shareholder dies, their shares form part of their estate and the executor or beneficiaries exercise the rights, and they may not know the business or want to be involved. Many companies use life insurance to fund a buy-sell arrangement, so the surviving shareholders buy the shares at an agreed price and the family receives cash.
四, 夫妻合伙及海外股东的特别问题
夫妻共同持股的公司, 一旦分居, 往往立即陷入僵局. 在澳洲, 离婚财产分割时, 联邦巡回及家事法院 (Federal Circuit and Family Court of Australia)可以把公司股份视为夫妻财产处理, 股东协议不能排除法院的权力, 但可以约定转让限制和回购程序, 减少对生意的冲击; 夫妻也可以考虑签订财务协议 (Financial Agreement). 有海外股东时, 应约定适用维州法律还是其他法律, 以调解或仲裁解决争议, 并确定中英文本哪一份具有效力.
如果是两代人共同持股的家族企业, 还要处理下一代加入, 姻亲持股, 不参与经营的家族成员如何分红等问题, 请参阅《家族企业股东协议: 澳洲家族公司为何需要股东协议及关键条款》 and《家族企业股东纠纷: 公司僵局, 调解与《公司法》第232条压迫行为救济》.
5. Checklist of common clauses
- Capital contributions, shareholder loans and calls for further funding.
- Rights to appoint directors and matters requiring unanimous approval.
- Dividend policy and rights to information.
- Deadlock and dispute resolution mechanisms, including mediation.
- Pre-emptive rights, valuation method, and tag-along and drag-along rights.
- Treatment of shares on death, incapacity, leaving or divorce, and insurance funding.
- Confidentiality and restraints, plus governing law and language version.
FAQs
We only have two shareholders. Do we still need an agreement?
Two equal shareholders are the most exposed to deadlock, so an agreement is even more important. Its cost is far lower than litigation later.
Does a shareholders' agreement need to be lodged with ASIC?
No. It is a private contract between shareholders and is not lodged with ASIC. However, share issues and transfers must still be notified to ASIC as required.
Can we sign an agreement years after setting up the company?
Yes, it can be signed at any time with all shareholders' agreement. It is best done before any dispute arises, because agreement becomes much harder once you disagree.
Can a shareholders' agreement keep shares out of a divorce property settlement?
Not entirely. The court can still take the shares into account, but the agreement can restrict transfers to a spouse and set buy-back procedures to protect the company and other shareholders.
Chua Tan Associates has practised in Melbourne since 1990, advising businesses and investors in Mandarin, Cantonese and English on company set-up, buying and selling businesses, commercial leases, contracts and commercial disputes. For help, call 03 9602 3988 or contact us online. We can meet at our Melbourne CBD office or by video.
This page provides general information only and is not legal advice.
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