In this edition of 'It depends', partner Clinton Jackson talks about what a shareholder agreement is and whether you need to have one.

Video transcript

Welcome to this edition of It Depends. Today I'm talking about whether you need a shareholder agreement.

What is a shareholder agreement?

A shareholder agreement is a tailored document that governs the rules between how shareholders of a company interact with each other and deal with the administration of a company.

How is a shareholder agreement different to a constitution?

A constitution for a company sets out the basic rules needed to operate the company. Although it's not essential to have a constitution, most companies do have a constitution that does set out the basic operational rules. That's different from a shareholder agreement because a shareholder agreement is much more tailored to your specific needs and deals with more comprehensive issues in relation to how the shareholders interact with each other.

What should I include in my shareholder agreement?

It depends. What you need to include in your shareholder agreement is going to be specific to your individual circumstances. Every group of investors and every company is different. So, what I include in my shareholder agreement might be different to what you include in yours. However, there are some key things that we always suggest people consider when looking to implement a shareholder agreement. It's important that your shareholder agreement talks about entry and exit of shareholders. So, what happens when someone is coming into the company and what happens when someone wants to leave? We also need to talk about what happens when someone dies or becomes totally and permanently disabled. Other important issues include dealing with who gets to be appointed as a director and how decisions are split between the directors and shareholders. One other issue that I think is always critical to deal with is valuation, because that affects so many issues in relation to how that company runs and the shareholders interact with each other.

Do I need a shareholder agreement?

Absolutely. A shareholder agreement is a specific, tailored document that deals with your circumstances and how the investors of your company want to interact with each other. If you look at your constitution, it will often be silent on these key issues about how you guys interact with each other and enter or exit that business.

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