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LEGAL A SHAREHOLDERS’ AGREEMENT CAN SAVE THOUSANDS Are you looking to raise capital by issuing shares? Are you looking at recruiting new shareholders? Are you hoping to safeguard the succession of your business and protect your existing shareholders? Then you should be thinking about your shareholders’ agreement. ABy Gladwin Legal Partner Rosalyn Gladwin. shareholders’ agreement change the balance of power between is a useful agreement that various shareholders. can provide protection and guidance regarding shares Protection for shareholders and shareholders in tricky situations. A shareholders’ agreement can offer Working alongside your company constitution, it provides a foundation for what a shareholder can and can’t do, as well as their rights and obligations. We explore some of the key reasons your business needs an effective shareholders’ agreement, cautioning that a poorly drafted one could cost you thousands. Dispute resolution At the initial stages of your business, the corporate roles are often blurred and undefined. This means that having hand-shake agreements are common and preferred. However, as your business continues to grow, it’s important to consider the roles of each party in the business in both the day-to-day management and strategic decisions of the company. The shareholders’ agreement should set out matters that require shareholder approval and which matters are reserved for the board. Importantly, a shareholders’ agreement should stipulate a formal procedure in place to deal with disagreements, which will prevent the time-consuming and expensive process of litigating the matter. Outlining all of these matters can mitigate future disagreements and the subsequent breakdown of relationships within the business. Additionally, having a poorly drafted shareholders’ agreement that doesn’t adequately protect the specific interests of your business can be just as detrimental when a dispute arises. Remember, these agreements are your safety net. Planning for the future When issuing shares and determining the terms of the shareholders’ agreement, it’s important to consider the future needs of the business – that is, to note that with each share issued, the voting power of any one member will be diluted and may specific protection for shareholders, such as through the inclusion of ‘tag-along’ and ‘drag-along’ provisions. A tag-along provision would entitle minority shareholders to participate in a majority shareholder’s share sale. Conversely, a drag-along provision would allow majority shareholders to ‘drag along’ minority shareholders in accepting a company offer to buy back shares. Confidentiality Having a confidentiality clause in a shareholders’ agreement can also prevent shareholders from utilising and disclosing confidential company information. And more ... Some of the questions that should be addressed by a well drafted shareholders’ agreement include: • Who will manage the business? Which decisions will require majority vote? How many directors will be appointed? Will there be a CEO or managing director? • What are the shareholder rights and obligations? If a shareholder, for example, becomes insolvent or breaches a material provision of the agreement, what will be the process and at what price will the company buy back their shares? Will there be drag/tag clauses? Will there be a restraint-of-trade clause restraining the shareholders? • How will decisions be made? Will it be by ordinary resolution of directors or by a special majority? Which decisions should be made by which type of majority? • Director appointments. Which shareholder will be entitled to appoint directors and how many can they appoint? • Delegation of rights to management. How many votes will each director have? Alternatively, will the voting rights be proportionate to their total shareholding? • How will the issuing, selling and transferring of shares be managed? If the company issues new shares to shareholders, what is the process for third party offerings? Will there be shareholder anti-dilution rights? • What is the dispute resolution process? Will there be a dispute resolution process? What are the time frames for this? We see lots of clients who need a shareholders’ agreement to protect their investment. We also see many who require dispute resolution because they haven’t set up clear boundaries and rules in the beginning of a relationship. Having an agreement can protect you from unnecessary headache and expense and can even protect your business and family relationships. About Rosalyn Gladwin Rosalyn is the principal of Gladwin Legal, being an expert in all facets of retail law, including commercial and corporate law and retail leasing. She has extensive legal experience in the retail industry, having worked in a national ASX listed retailer for seven years as well as in highly regarded national and international law firms. About Gladwin Legal Gladwin Legal is the law firm for retailers. As experts in retail law, the firm understands the legal matters that challenge retailers daily. Its areas of expertise include retail and commercial leasing, supply and distribution agreements, intellectual property, ecommerce and IT agreements, sale of business and competitions and trade promotions. Get in touch at gladwinlegal.com.au. 64 RETAIL WORLD APR, 2021