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Company Law - Importance of Shareholder Agreements
February 2011
This article is about the importance of setting up the “Rules of the Game” for any business you run, particularly where you might have co-shareholders or partners in the business.
After the first rush of excitement in starting a business, we all know then comes the more humdrum and exacting long haul of continuing to run it in a profitable fashion.
This can inevitably lead to pressures between business colleagues (whether they be partners in a partnership or shareholders in a company or otherwise).
One of the questions I am frequently asked is: “How do I get my business partner to do their job appropriately and what happens when we have a falling out”.
There is no hard and fast rule in these situations, but my first comment is “Preparation in advance is more likely to avoid problems than trying to deal with them after the horse has bolted”.
You may well ask: “What preparation can I do?”.
The preparation I am thinking of involves not only talking through your aims and aspirations with your business partners before you set up the business and on an ongoing basis, but also having in place an appropriate Shareholders Agreement or Partnership Agreement which sets out the “rules of the game”. These can deal with what happens if one partner wants to get out and the others want to stay in and different methods of breaking deadlocks if insurmountable issues arise between the partners.
Although we do not want to face this as a likely prospect at the beginning, a little bit of forethought will make it hopefully easier than having a long drawn out Court battle which is a strong possibility if there is not a reasonable set of rules in place to start with.
These decisions and the necessary options need to be looked at in light of your overall planning with advice from your lawyers and accountants.
Hopefully once you have a set of rules, and you continue to work within them and keep each other informed as to your thoughts, then you will have little further use for looking at the document and all will be well. If something goes wrong you will at least have those rules to fall back on to help manage the downside.
Other common rules of the game that you need to think about are your own terms of trade which govern your relationship with your suppliers and your customers. I am frequently asked questions about those and will deal with those in another article.
I welcome any feedback.
John Graves
Principal
Bradfield & Scott Lawyers
Level 1, 175 Macquarie Street
Sydney NSW 2000
Telephone: 9233 7299
Email: jgraves@bradscott.com.au
After the first rush of excitement in starting a business, we all know then comes the more humdrum and exacting long haul of continuing to run it in a profitable fashion.
This can inevitably lead to pressures between business colleagues (whether they be partners in a partnership or shareholders in a company or otherwise).
One of the questions I am frequently asked is: “How do I get my business partner to do their job appropriately and what happens when we have a falling out”.
There is no hard and fast rule in these situations, but my first comment is “Preparation in advance is more likely to avoid problems than trying to deal with them after the horse has bolted”.
You may well ask: “What preparation can I do?”.
The preparation I am thinking of involves not only talking through your aims and aspirations with your business partners before you set up the business and on an ongoing basis, but also having in place an appropriate Shareholders Agreement or Partnership Agreement which sets out the “rules of the game”. These can deal with what happens if one partner wants to get out and the others want to stay in and different methods of breaking deadlocks if insurmountable issues arise between the partners.
Although we do not want to face this as a likely prospect at the beginning, a little bit of forethought will make it hopefully easier than having a long drawn out Court battle which is a strong possibility if there is not a reasonable set of rules in place to start with.
These decisions and the necessary options need to be looked at in light of your overall planning with advice from your lawyers and accountants.
Hopefully once you have a set of rules, and you continue to work within them and keep each other informed as to your thoughts, then you will have little further use for looking at the document and all will be well. If something goes wrong you will at least have those rules to fall back on to help manage the downside.
Other common rules of the game that you need to think about are your own terms of trade which govern your relationship with your suppliers and your customers. I am frequently asked questions about those and will deal with those in another article.
I welcome any feedback.
John Graves
Principal
Bradfield & Scott Lawyers
Level 1, 175 Macquarie Street
Sydney NSW 2000
Telephone: 9233 7299
Email: jgraves@bradscott.com.au
