Commercial law

Shareholders Agreements – Major Policy Matters

These are matters which are defined, by the shareholders agreement, as requiring a majority or unanimous resolution or agreement of members.

They are of prime importance because within any corporation there are various layers of power and control. The top layer of power vests in the directors. The next layer is with the key employees and managers and down it goes to the minority shareholder.

If problems occur within a company it usually has its genesis in a struggle between all or some of the layers of power, when the minority may not agree with something that has been done or not done (usually related to monies received or transactions entered into by the directors of questionable value to the company) and the upper layer of power does not take kindly to interference in what it may see as everyday management and control issues.

One means of protection is to have a provision enabling shareholders or groups to have a nominated board member.

The other means is to clearly provide limits of authority and consultation obligations on issues such as:

• Any change in share capital, including share allotment or share class alteration, and the terms of any allotment.
• The consent to or approval to a transfer of shares.
• Any change to the basis of accounting.
• The declaration of dividends, frequency and if profits are to be subject to retention.
• The delegation of any powers of directors, the terms of such delegation and the process in the alteration of any such powers.
• The requirement for approval in relation to the company entering into any contract in which any director, spouse or relative has an indirect or direct financial interest.
• Payment of any pension, superannuation, annuity or other benefit other than in accordance with the requirements of an Industrial Award or law.
• Payment to a director or spouse or relative under the terms of employment or otherwise.
• The purchase of major assets above a certain price.
• The entry into debt obligations above a certain amount.
• Any substantial change in the nature of the company’s business.
• Creation of any charge over the company’s assets.
• The subscription for or purchase of any shares in any company.
• Any transaction other than in the normal course of business.
• The treatment of loans to the company – can they be required to fund something upon a percentage vote of shareholders – what interest will the loans carry – consequences of not providing – trigger a right on others to buy out.
• Policy as to granting of guarantees and procedures to require a shareholder to grant – consequences of non-compliance.
• Saleof shares – pre-emptive rights – first refusal rights – sale to a third party.
• Terms of employment of principals – linking to an employment agreement – rights to terminate – making all shareholders parties to the decision.
• Events such as death, retirement and procedures to buy out estate.   Payment of purchase price for shares.
• Procedures for overcoming deadlocks – use of a third party or mediation and standard dispute resolution procedures.
• Obligation to exiting shareholders to have incoming transferee adopt terms of agreement.
• Shareholders being obliged to effect life policies on themselves with the death cover being equal to the value of the shareholder.

The Shareholder’s Agreement is not a guarantee against litigation but empowers a shareholder by making available a mechanism that can be enforced like any other contract. It also establishes an orderly market for what otherwise are illiquid assets in circumstances which may be acrimonious.

When it comes to addressing these complex matters, the expertise of a business lawyer is invaluable. Their guidance in crafting and enforcing these provisions can help safeguard the interests of all parties involved and maintain the integrity of the corporation.