Shareholders

Shareholders
Agreements
Agreements

www.turtons.com
Overview
The purpose of a shareholders agreement is to
regulate the relationship between a company’s
shareholders, and between the shareholders and the
company.

Shareholders adopt shareholders agreements to give

them some certainty around how the company will be
managed, and how particular situations will be dealt
with.

You are not required to have a shareholders

agreement. If you don’t have a shareholders
agreement, your company’s constitution will provide a
default set of rules, as will the Corporations Act, other
legislation and general law.

The reason people adopt shareholders agreement is

because they would prefer to have a set of rules that
has been developed specifically with their situation
in mind. These rules often deal with matters that are
not covered by the company’s constitution or by other
law, or deal with them in a way that is different to the
usual position.

This guide explains the types of provisions that are usually

found in a shareholders agreement, and provides practical tips
about how you might go about designing one. It is, however,
not intended to be a substitute for legal advice. An effective
shareholders agreement can only be developed with your
specific circumstances in mind.
 Contents
Shareholders 01. PARTIES

Agreements: 02. RELATIONSHIP WITH OTHER DOCUMENTS

A Comprehensive
Guide
03. THE PURPOSE AND SCOPE OF THE VENTURE

04. THE BOARD OF DIRECTORS

05. DECISION-MAKING

06. DISPUTE RESOLUTION

07. SHAREHOLDERS’ RIGHTS TO INFORMATION

08. INSURANCE

09. CAPITAL RAISING AND ISSUING NEW SHARES

10. SHARE TRANSFERS

11. SHAREHOLDER RESTRAINTS

12. MISCELLANEOUS PROVISIONS

13. PREPARING AN AGREEMENT

14. GLOSSARY OF USEFUL TERMS

15. SAMPLE DECISION-MAKING MATRIX

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Shareholders Agreements:
A Comphrehensive Guide
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6 Shareholders Agreements: A Comprehensive Guide Turtons
1. Parties
The parties to a shareholders
agreement are the shareholders in
the company itself. It’s important for
the company to be a party, because
shareholders agreements will usually
contain obligations on the company.
Those obligations can’t be enforced
against the company unless it is a party
to the agreement.
When new shareholders join the
company, they are usually required to
become bound by the shareholders
agreement as a condition of their
subscription. They normally do this
by signing a ‘Deed of Adherence or
‘Accession Deed’. Sometimes the
shareholders agreement will contain a
prescribed form.
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2.Relationship with
other documents
In Australia, the main
piece of legislation
governing companies is
the Corporations Act.
The Corporations
Act contains a set of
‘Replaceable Rules’ that
deal with the internal
management of companies.
These rules can be
modified or displaced
by the provisions of a
company’s constitution.
If you set up a new
company through an
accountant, lawyer or shelf
company provider, they will
normally provide a generic
constitution as part of the
service. Usually, these
constitutions will state that
Shareholders Agreements: A Comprehensive Guide
the replaceable rules in
the corporations act do not
apply. (If the replaceable
rules are not intended to
apply to your company,
it is important that this is
set out in the constitution.
Otherwise, you could find
yourself bound by rules
that you are unaware of.)
If you enter into a
shareholders agreement, it
will usually be expressed to
take precedence over the
company’s constitution.
When preparing a
shareholders agreement,
it is important check the
company’s constitution to
limit the potential areas of
overlap and inconsistency.
7
This is to minimise
confusion and to ensure
that the provisions in the
shareholder agreement
will operate as they are
intended.
Companies adopt
shareholders agreements,
rather than amending their
assisting constitutions,
principally because
shareholders agreements
have more flexibility. For
example, the Corporations
Act contains provisions
about how constitutions
may be amended. A
company may prefer that
amendments be permitted
where a higher or lower
number of shareholders
agree.
8 Shareholders Agreements: A Comprehensive Guide Turtons Turtons Shareholders Agreements: A Comprehensive Guide 9

4. The Board of Directors

3.The Purpose
and Scope of The shareholders agreement
should define the overall

the Venture
purpose and objects of the
venture. This is an important
statement, as it will often define
the parameters in which the The shareholders agreement should identify the maximum number of
company’s board of directors is directors, and it should also identify the minimum number of directors
allowed to operate. that should be present at a meeting for the meeting will be effective.
(This is known as a ‘quorum’.)
These provisions are intended
to give the shareholders comfort Even where a shareholders agreement sets out the initial directors, the
that the company will generally agreement should explain how new directors are appointed, and how
do (or at least attempt to do) existing directors may be removed or replaced.
whatever the shareholders have
agreed at the outset. These
Usually, shareholders with a gives the shareholders certainty
provisions are particularly
minimum proportion of shares around the group of people
important for passive investors
(normally upwards of 15-20%) will who might be able to influence
who are not on the board of
have the right to appoint a director. decisions affecting the company’s
Directors and who do not
Otherwise directors are appointed affairs.
otherwise play an active role in
by the shareholders in general
the running of the company.
meeting. Sometimes, where there Some shareholders agreements
is a vacant seat on the board, will require that the board have a
For reference purposes,
the board will have the ability to minimum number of independent,
shareholders agreements will
appoint a new director to fill the non-executive directors, one of
often set out the basic features
vacancy. whom may be required to be the
of the company at the time the
chairperson.
agreement is signed.
A company’s constitution or
shareholders agreement will often Companies will sometimes
These basic features include
permit or prohibit the appointment prescribe limits on how long a
things like the maximum
of an alternate director. person may be a director, although
number of directors that may
this tends to be less common for
be appointed in the future,
Allowing alternate directors privately owned companies.
a required minimum number
provides flexibility, for example,
of directors, the identities of
where a director knows that they Shareholders agreements will
the initial directors and the
will be unable to attend regular usually state how often directors
number of shares held by each
meetings for a period of time. meetings are to occur. The most
shareholder.
Prohibiting alternate directors common frequency is monthly.
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5. Decision-Making
5.1 Approval Levels

One of the more important parts of a shareholders agreement is the part that
explains how decisions will be made. Different types of decisions will require
different levels of approval. The most common levels are:

(a) the CEO;

(b) the Managing Director;

(c) the board of directors;

(d) a simple majority of shareholders (50%);

(e) a special majority of shareholders (75% or some other number

identified in the shareholders agreement);

(f) unanimous approval.

Also, there might be particular types of decision where a certain shareholder or

group of shareholders requires a right of veto.

Usually, decisions relating to the day-to-day management of the company are

delegated to the CEO or Managing Director, with the overall supervision, control
and strategic direction provided by the board. Decisions requiring shareholder
approval are usually limited to exceptionally large decisions that do not arise in the
ordinary course of business, matters that affect the shareholders rights, or matters
that affect the control of the company (for example, in relation to the appointment
of new directors).

A shareholders agreement will often contain a list of the different types of

decisions that might need to be made, and then identify who is empowered to
make those decisions. At the end of this guide is a sample decision-making matrix
that effectively summarises some of the more common types of decision that are
regulated by shareholders agreement.
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5.2 Circulating Resolutions

Traditionally, company decisions were made through

formal resolutions passed at meetings of directors or
shareholders.

It is now increasingly common for companies to 5.3 Deadlock

streamline the formal decision making process by
prescribing ways in which decisions can be made without
parties having to be physically present. Even where the shareholders agreement sets out different approval levels
for different types of decision, it is possible that a deadlock situation can
The most common method, particularly for smaller arise. It is important for you to think about what will happen, if you and
companies, is by circulating resolution. This is a your fellow shareholders ever reach a point where you cannot agree on
document signed by the people who are entitled to a matter and this results in the company being unable to do a particular
vote on the matter in question. Some companies have thing. The most common ways for deadlocks to be resolved are:
provisions that allow circulating resolutions to be passed
where less than 100% of the people entitled to vote on (a) the appointment of an independent person or persons to
make the decision and;
the resolution have signed the document. Many will
also provide for the passing of circulating resolutions
(b) a mechanism that allows one shareholder (or group of
other than by a physical signature (for example, through shareholders) to buy out the others, so that they can obtain
an email indicating an approval). It should be noted control of the company.
that the Corporations Act can place limits on the use of
circulating resolutions unless care is taken in setting up
the constitution and shareholders agreement.
 14 Shareholders Agreements: A Comprehensive Guide
6. Dispute Resolution
Many shareholders agreements
will contain dispute resolution
provisions.
Mediation, expert determination
and arbitration clauses are the most
common. They required that the
parties resolve or attempt to resolve
a dispute in a particular way, before
any court proceedings can be
commenced.
The main purpose of these provisions
is to ensure that if a dispute arises
between the shareholders, that
dispute will be resolved quickly and
in the fairest and most cost effective
way possible.
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It is important to recognise that the
dispute resolution provisions are
different to deadlock provisions. Any
formal dispute resolution process
is likely to expensive and take time,
both of which will be detrimental
to the underlying asset (i.e. the
business).
Indeed, perhaps the most important
function of the shareholders
agreement is to prescribe what will
happen where disagreements arise.
An effective shareholders agreement
will contain a mechanism that will
allow an outcome to be reached as
quickly as possible and without the
parties ending up in court. This is an
area of your shareholders agreement
that deserves special attention.
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7.Shareholders’
Rights to Information
As a shareholder, your rights
to information are relatively
limited. This is because, in the
eyes of the law, management
of the business should be left
to management and the board
and shareholders should not
be given access to company
information unless it somehow
directly impacts their interests as
a shareholder.
Because of this, and particularly
for private companies,
shareholders agreements will
often require the company
to provide a greater level of
information to shareholders than
is required by law. For example,
some shareholders will require:
(a) the circulation of regular
management accounts
(often monthly or shares be sold.
quarterly);
(b) circulation of the
company’s annual
accounts in more
detail than is required by
the Corporations Act; and
Shareholders Agreements: A Comprehensive Guide 15
(c) some form of report
summary to shareholders
by the company
(sometimes quarterly, bi-
annually or annually).
Some shareholders may also
require access to particular
documents or information, for
example where there are grounds
to suspect misconduct by the
board.
If a shareholder becomes
associated with a competitor
(for example, as an employee,
consultant or shareholder),
the shareholders agreement
would normally prescribe that
that person’s right to receive
information about the company
would cease, and it may also
provide that the shareholder’s
16 Shareholders Agreements: A Comprehensive Guide Turtons Turtons Shareholders Agreements: A Comprehensive Guide 17

8. Insurance
9.Capital Raising
Sometimes shareholders agreements will
and Issuing New Shares
prescribe that certain types of insurance should
be maintained by the company at the company’s
expense. Independently of public liability
One of the biggest concerns of shareholders, particularly smaller ones, is to
insurance and other types of insurance that may
ensure that their holding in the company is not unreasonably diluted by the
be relevant given the nature of the company’s
company issuing new shares.
business, the shareholders agreement may
provide for:

(a) key man insurance, which provides

Often the company will have some ability to issue shares without
protection to the company in the event a key
shareholder approval, provided it does not do so beyond certain
member of its management team were
to die or become incapacitated; limits. For example, the board may be given permission to:

(b) buy/sell insurance, which provides funding (a) issue shares under employee share schemes, up to
for the company or other shareholders a limit;
to buy out another shareholder’s shares if
that shareholder were to die or become (b) issue shares for the purposes of a particular fund
permanently incapacitated. raising effort, provided there are rules around the
price and the total number of shares that may be issued.

Otherwise, normally shares must be offered to the existing

shareholders in proportion to their existing shareholdings, before
they are offered to third parties. Shareholders agreements will
often prohibit the board from issuing new shares without special
majority approval.
 18 Shareholders Agreements: A Comprehensive Guide
10.Share
Transfers
10.1 No Transfers
The general rule under shareholders
agreements for most privately owned
companies is that shares may not be
sold or transferred, except in limited
circumstances.
The reason for this is that the relationship
between the shareholders of most
privately owned businesses is a personal
one. That is, the shareholders are
committing to the venture on the basis
that they will be dealing with specific
people. They therefore wish to control
the people who may be able to become
involved in the venture.
10.2 Related Party Transfers
One exception to the general ‘no
transfer’ rule is that shareholders will
often be permitted to transfer their
shares to a related party, provided
that the ultimate control of the share
is unchanged. This most commonly
occurs where a shareholder wishes to
restructure their personal affairs.
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Shareholders usually
want control over who
can participate in the
venture with them.
Shareholders Agreements: A Comprehensive Guide 19
10.3 Pre-emptive Rights
Where a shareholder wishes to sell Where shares are not bought by the
shares, they will usually be required to other shareholders under a pre-emptive
offer those shares for sale to the existing round, the seller would ordinarily be
shareholders before they can be sold permitted to sell the shares to a third
to anyone outside the venture. This party, provided:
is for the same reason as described
above, namely that shareholders want (a) the terms offered to the third-
some control over who will be able to party are no more favourable
than the terms offered to the
participate in the venture with them.
other shareholders; and
The rights of the other shareholders to (b) the sale to the third-party occurs
be given the opportunity to buy those within a specific period of time
shares are usually called ‘pre-emptive (for example, 60 to 90 days).
rights’ or ‘rights of pre-emption’.
Sometimes it will be a requirement of a
pre-emptive round that all of the shares
being offered to the other shareholders
are sold (otherwise will be sold). This is
because the existing shareholder may
wish to retain the ability to sell all of its
shares to a third party, which could be
important where an interested buyer
wishes to acquire a minimum number of
shares in the company but not all of the
shares being offered for sale.
20 Shareholders Agreements: A Comprehensive Guide
10.4 Drag Along
Usually, major shareholders will want
the ability to sell the entire company
if the opportunity arises. Because
of this, shareholders agreements
will normally contain provisions that
effectively allow a large shareholder
(or group of shareholders) to facilitate
such a sale without the consent of the
other shareholders provided all the
shareholder are treated the same way in
the sale.
These types of provisions are commonly
known as ‘drag along’ rights. They allow
a shareholder or group of shareholders
to ‘drag’ other shareholders into a joint
sale.
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10.5 Tag Along
A ‘tag along’ provision is almost the
inverse of a ‘drag along’. The idea
of a tag along provision is to protect
smaller shareholders, by giving them the
opportunity to participate in a sale that is
initiated by a larger shareholder.
For example, say a large shareholder
finds a person who is interested in
buying that shareholder’s shares, but
who is not interested in buying the
entire company. A ‘tag along’ provision
would allow the smaller shareholders to
require that at least some of its shares
are sold to the third party buyer, along
with the shares being sold by the large
shareholder.
Normally all of the participating
shareholders would be allowed to sell
the same proportion of their shares
under a tag along provision if not all of
their shares are being sold.
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10.6 Forced Buy/Sell, Roulette
Some shareholders agreements
will give a shareholder (or group of
shareholders) the right to buy another
shareholder’s shares, even if they
would prefer for them not to be sold.
These types of provisions are often
included as a way to ensure that a
large shareholder will always have
the ability to control the company
and its share register. They are
often triggered as a way to bypass a
deadlock or avoid a dispute.
Often, the price of the sale will be
prescribed by the agreement. For
example, it might be the fair value of
the shares plus a premium to reflect
that the sale is involuntary.
Shareholders Agreements: A Comprehensive Guide 21
Sometimes these provisions are
coupled with a regime that allows
counter-offers to be made, on the basis
that the person who is prepared to pay
the most for the other person’s shares
will end up owning the company.
The opposite of a forced sale provision
is a forced buy provision, where one
shareholder can require its shares to
be bought out by the company or the
other shareholders. These types of
provisions are less common, at least
not without the seller having to offer a
very significant discount to the value of
their shares as a condition of the sale.
The purpose of this type of provision
is to give a shareholder the ability to
exit the company in circumstances
where the other shareholders are not
prepared to buy its shares at full value.
22 Shareholders Agreements: A Comprehensive Guide
10.7 Compulsory Transfers
Many shareholders agreements will contain
provisions to require a shareholder to sell its shares
to the company or the other shareholders where the
shareholder:
(a) becomes insolvent;
(b) breaches a material term of the Deemed transfers will usually be treated as a breach of the
agreement, such as an anti-competition, shareholders agreement, potentially resulting in the defaulting
restraint or a breach of a confidentiality
provision; or
(c) engages in some other serious misconduct.
Sometimes the shareholder will be required to sell its
shares at a discount. Whether that is an appropriate
remedy will depend on the nature of the default and
also the circumstances in which the party became
a shareholder. Also, where the clause contemplates
a discount, there may be a risk that the clause is
unenforceable as a penalty.
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10.8 Deemed Transfers
Where a shareholder is a company and control of that company
changes through a transfer of shares, that will usually be treated
as a deemed (and therefore prohibited) transfer for the purposes
of the shareholders agreement. Again, the idea is to prevent
shareholders from selling their shares to third parties without the
other shareholders being able to buy the shares if they want to.
shareholder’s shares being sold to the company or to the other
shareholders.
10.9 Requirement to be bound
by Shareholders Deed
Whenever a new shareholder joins the company, it is usually a
condition of their investment being accepted that they be required
to be bound by the shareholders agreement. This is a key
requirement for all existing shareholders, because they will only be
able to enforce the shareholders agreement against people who are
bound by it.
24 Shareholders Agreements: A Comprehensive Guide Turtons Turtons Shareholders Agreements: A Comprehensive Guide 25

11. Shareholder Restraints

The appropriateness of some of these restraints may depend on the nature of the
Shareholders agreements will usually
company and the investor. Some investors, particularly passive ones, may not be
contain provisions that prevent the
prepared to agree to certain restraints in light of their personal circumstances and
shareholders from doing certain things
their activities outside of the business.
while they are a shareholder, and for
a period of time after they cease to
Also, you will need to keep in mind that any restraint runs the risk of being
be a shareholder. For example, the
unenforceable as a matter of law. If you wish to include restraints in your agreement,
shareholders might be restrained from:
you will need to ensure that they identify, with precision, what is prohibited, and they
(a) attempting to entice employees do no more than is necessary to protect the company’s legitimate interests.
away from the business;

(b) having any involvement with a

competitor, whether as an
employee, director, consultant,
shareholder or otherwise;

(c) operating a business in

competition with the business of
the company;

(d) attempting to divert any business

away from the business; or

(e) doing anything else that may give

rise to a conflict of interests.
26 Shareholders Agreements: A Comprehensive Guide
Miscellaneous
12.
Provisions
Shareholders agreements will contain various other
provisions in addition to those described above, many of
which will be fairly generic. Some examples are below.
12.1 Warranties
Sometimes the parties will give each
other basic corporate and authority
warranties. For example, they may
warrant to each other that they are
duly incorporated, that they are
authorised to enter into the agreement
and that they will not breach any laws
or agreements by entering into the
agreement.
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12.2 Attorney Provisions
Where a party breaches the shareholders
agreement, the document will normally
contemplate the automatic appointment
of someone else to act as the defaulting
party’s attorney. The idea is to ensure that
if any documents need to be signed by
the defaulting party, those documents can
be signed on the defaulting party’s behalf
(and without anything being required of the
defaulting party).
An example is where a shareholder becomes
required to sell its shares under the
agreement. If the shareholder would prefer
not to sell its shares, it may not be prepared
to sign the necessary documents. To ensure
the sale can proceed, the document will
normally give someone else the ability to sign
documents on the defaulting party’s behalf.
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12.3 Amendment
Unless there is a provision to the contrary,
the shareholders agreement may only
be amended with the agreement of all of
Although it
signatories. This opens up the potential
for the company and shareholders to be may contain
‘greenmailed’ by a single shareholder. It some generic
is becoming increasingly common for
shareholders agreements to allow for
provisions, your
amendments where less than 100% of the shareholders
shareholders agree to it. For example, agreement
they may permit amendments (or certain
types of amendments) to be made where
should be
a special majority of shareholders (or tailored to your
some other percentage) agree to it. circumstances.
 28 Shareholders Agreements: A Comprehensive Guide
13. Preparing an Agreement
Although most shareholders agreements deal
with similar subject matter, and many of them
will contain similar provisions, there is no such
thing as a ‘standard document’.
An agreement that works well for one company
may be totally inappropriate for another. The
purpose of the shareholders agreement is to
regulate relationships. The circumstances of
individual shareholders will be different from
company to company, as well the nature of the
relationships between them.
For example, consider the following scenarios:
(a) two shareholders owning
95% and 5%;
(b) two shareholders owning 50% each; and
(c) three shareholders, owning 40%, 30% and
30%;
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The nature of each of these relationships will
be different, and this should be reflected in the
terms of the shareholders agreement.
Other relevant considerations are the size of the
company, the nature of its business, the history
of the business (for example, whether it is a
start-up or an established venture), the nature
and value of the company’s assets, the age
of the shareholders, the level of participation
of individual shareholders in the company’s
management, and the capacity of individual
shareholders to buy each other’s shares in the
event of a disagreement.
Given that a shareholders agreement will only
become relevant if a disagreement arises,
it is worth giving careful consideration to
how disagreements will be resolved in light
of your circumstances and the nature of the
relationships between you and your fellow
shareholders.
30 Shareholders Agreements: A Comprehensive Guide Turtons Turtons Shareholders Agreements: A Comprehensive Guide 31

Glossary of
14.
Useful Terms Attorney Provision A clause that permits a person to sign
documents for another person.

Bad Leaver Provision A clause that explains how shares will be

dealt with where a shareholder leaves the
Accession Deed A deed signed by a new shareholder
company in adverse circumstances, such as
agreeing to be bound by the company’s
engaging in competition with the company,
shareholders agreement.
fraud or other serious misconduct.

Alternate Director A person nominated by a director to stand in

Anti-Dilution Provision
Anti-Poaching Provision
Arbitration
Board The directors of the company, acting as a
that person’s place at a board meeting if the
board of directors.
director cannot attend. An alternate director
has the same powers as the director at the
Buy/Sell Agreement An agreement that allows the company, a
meeting.
shareholder or a group of shareholders to
buy another shareholder’s shares on the
A clause that protects shareholders against
occurrence of a specific event (usually death
the risk of dilution. For example, it might
or permanent incapacity). The purchase
limit the circumstances in which shares may
price of the shares is often funded, at least in
be issued, or it might require new shares
part, by buy/sell Insurance.
to be issued to ‘top up’ the shareholder’s
existing shareholding.
Buy/Sell Insurance Insurance that is triggered on the death or
permanent incapacity of a shareholder, and
A clause that prevents a person from
which is used to pay for the shareholder’s
attempting to ‘poach’ (or entice away)
shares (often under a buy/sell agreement).
employees from the company.
The insurance proceeds are often paid to
the shareholder or their estate, in exchange
A form of dispute resolution that involves
for the shareholder selling their shares to the
the appointment of an independent person
company or other shareholders. There are
to hear the dispute and make a binding
numerous tax issues involved in how those
decision. Arbitration is similar to litigation,
agreements are structured.
except that the arbitrator is an individual
appointed by the parties (not a judge) and
Buy-back The ‘buying back’ by the company of shares
the proceedings are conducted in private
from a shareholder. Once shares are bought
(not in court).
back by the company, they are cancelled.

Attorney A person who is appointed to sign

documents for another person (as in, ‘power
of attorney’).
32 Shareholders Agreements: A Comprehensive Guide Turtons Turtons Shareholders Agreements: A Comprehensive Guide 33

D&O Insurance a company’s directors if a claim is made

Casting Vote A deciding vote.
against them by the company or third
parties.
Chairperson The person appointed to ‘chair’ (or
manage) a meeting. Often, a chairperson
Deadlock A situation where the directors or
is appointed for a period of time. However
shareholders are unable to reach an
the chairperson can also change from
agreement.
meeting to meeting, such as where there is
a rotating arrangement or where the regular
Deadlock Provision A clause that explains how a Deadlock will
chairperson is absent.
be resolved.
Change in Control A change to the person or persons who
Deed A special type of agreement that must be
have control over a company or trust. For
signed and exchanged in a particular way.
example, if shareholders of a company
From a legal perspective, it has different
sell all of their shares to another person,
properties to a regular agreement.
that company will experience a change in
control.
Deed of Access and See ‘Deed of Indemnity’ below.
Indemnity
Circulating Resolution A document signed by directors or
shareholders to indicate their approval of
Deed of Adherence Another expression for ‘Deed of Accession’.
a resolution. Circulating resolutions are a
method of making decisions without having
Deed of Indemnity A deed signed by a person, usually the
to attend meetings.
(Officer’s Deed of company, to give specific protections to
Indemnity) another person. The most common type is
Constitution A set of rules that regulates the internal
an Officer’s Deed of Indemnity, where the
management of a company, including the
company agrees to indemnify an Officer
relationship between shareholders, and
if a claim is made against that person
between the shareholders and the company.
while acting as an officer. An Officer’s
Under the Corporations Act, all companies
Deed of Indemnity (or Deed of Access
in Australia have a constitution. Where the
and Indemnity) will usually give the officer
company has not adopted a constitution, the
rights of access to the company’s records
replaceable rules apply.
in various circumstances, such as where a
claim is made against them.
Corporations Act The Corporations Act 2001 (Cth), being
the main piece of legislation that regulates
Deemed Transfer Provision A clause that contemplates the automatic
companies in Australia.
(Deemed Offer Provision) transfer or offer to transfer shares by one
Insurance that protects the interests of
person to another on the occurrence of a
specific event.
34 Shareholders Agreements: A Comprehensive Guide
Dilution A reduction in a shareholder’s proportionate
ownership in a company that occurs when
new shares are issued.
Dividend Policy A written policy that explains how and when
dividends will be calculated, declared and
paid.
Drag Along Where a shareholder wishes to sell its
shares, a clause that allows the shareholder
to ‘drag’ others into the sale without their
consent. The most common type is a clause
that allows a major shareholder to drag
other shareholders into the sale of the entire
company.
Enterprise Value The value of the entire company or
enterprise.
Exit Event An event that will result in all shareholders
having the ability to sell most or all of its
shares, such as a business sale, share sale
or listing on a stock exchange.
Expert Determination A dispute resolution process where the
parties agreed to appoint an independent
expert to make a decision about a
specific matter. Expert determinations
can be binding on non-binding. Expert
determinations are usually made without a
formal hearing and occur outside the public
domain.
Turtons Turtons Shareholders Agreements: A Comprehensive Guide 35
Fair Value ‘Fair Value’ is usually a defined term and
is sometimes used to provide additional
elements of value over and above ‘Market
Value’ of shares and usually where the
market value for a minority interest in the
company is being considered. For example,
it may be defined to take into account
the value of losing employment if shares
are sold and continued employment was
a significant element in the shareholder
subscribing for shares to begin with.
General Meeting A meeting of shareholders.
Good Leaver Provision A clause that explains how shares will be
treated where a shareholder leaves the
company who is not a ‘Bad Leaver’. (See
‘Good Leaver Provision’ above.)
Indemnity A promise by one person to protect another
person against claims or losses suffered by
the other person.
Key Man Insurance Insurance that pays an amount to the
company to alleviate the effects of a specific
person dying or becoming permanently
incapacitated.
Liquidity Event Another expression for ‘Exit Event’.
36 Shareholders Agreements: A Comprehensive Guide Turtons
Market Value ‘Market Value’ is an objective assessment
of the value of the relevant parcel of shares.
A small parcel of shares has a lower market
value per share than a larger parcel of
shares, particularly a parcel greater than
50%. It is important to understand that the
market values of any parcel of shares is
not the same, and is less than the relevant
proportion of the enterprise value.
(The definitions of ‘Fair Value’ if any and how
it relates to ‘Market Value’ can be critical,
as they will often prescribe the amount a
shareholder will be paid if they leave the
company.)
Mediation A form of dispute resolution where the
parties agree to appoint an independent
person to facilitate a negotiation of a
resolution. The mediator does not have the
power to make a binding decision.
Member Another word for ‘shareholder’.
Minority Discount A discount that applies to a parcel of shares
that is less than 50% of the total number of
shares on issue to reflect the lack of control
a small shareholder has over the affairs of
the company.
By way of illustration, each share in a single
parcel of 99% of the company’s shares will
have greater value than a share with 1%.
This is because a person owning 99% of
the company’s shares has far greater voting
rights than the person owning 1%.
Turtons Shareholders Agreements: A Comprehensive Guide 37
Minority Value The value of shares where the shares
comprise less than 50% of the total shares
on issue.
Non-Solicitation Provision A clause that prohibits a person from
attempting to entice employees or
customers away from the company.
Officer A director or secretary of the company, or
another person who participates in making
decisions that affect the whole company or
a substantial part of it.
The Corporations Act defines ‘officer’
broadly. A person does not need to be
named as an ‘officer’ to be deemed an
‘officer’ for the purposes of the Corporations
Act.
Option A right to buy a share in a company.
Pre-Emptive Right A shareholder’s right to be given the
opportunity to buy a share before that share
is offered for sale to another person.
Proxy A person who is appointed to cast a vote at
a meeting on behalf of another person.
Quorum The minimum number of people that must
be present at a meeting before the meeting
can be a valid one. As between directors
and shareholders, resolutions made at a
meeting will not be effective unless there is
a quorum.
Replaceable Rules A default set of rules in the Corporations Act
(called the ‘Replaceable Rules’) that regulate
the internal management of a company. The
Replaceable Rules will apply unless they are
displaced by a provision in the company’s
constitution.
38 Shareholders Agreements: A Comprehensive Guide Turtons
Resolution A decision to do (or not do) something.
Restraint A clause that prevents a person from doing
a specific thing, such as a non-solicitation
provision or an anti-poaching provision.
Roulette Provision A clause that contemplates shareholders
making a series of offers and counter offers
between one another to buy the other
shareholder’s shares. At the end of the
process, the person making the highest bid
will buy the other person’s shares, and that
other person will leave the company.
Securities Any type of interest in a company, such as a
share or option.
Shareholder A person who owns shares in a company.
Shareholders Agreement An agreement that regulates the
relationship between shareholders, and
between the shareholders and the company
on issues not usually dealt with in the
constitution. It is a separate document to
the constitution. Companies are not obliged
to have a shareholders agreement.
Special Majority A specific proportion of votes that may be
cast by shareholders at a general meeting,
always more than 50%. This is often
75%, however it varies depending on the
composition of the company’s share register
and the nature of the decision in respect of
which it will operate. There can be several
levels of special majority depending on the
decision to which they are to apply.
Turtons Shareholders Agreements: A Comprehensive Guide 39
Special Majority Decision A decision that must be passed by a special
majority.
Subscriber A person who applies to buy (or ‘subscribes
for’) shares in a company.
Tag Along The right of a shareholder, usually a
minority shareholder, to participate in (or
‘tag along with) a sale of shares by another
shareholder.
For example, where Shareholder A finds a
buyer for its shares, a tag along provision
will allow Shareholder B to ‘tag along’ and
sell at least some of its shares to the buyer
as well.
Voting Agreement An agreement between a group of
shareholders about how their votes will be
cast.
Often, a voting agreement will require all
votes to be cast in the same way, even
where a member of the group would prefer
to cast its vote differently.
Warranty A promise made by one person to another,
usually about a specific thing at a specific
point in time. For example, a person might
‘warrant’ that it owns the shares that it
claims to own.
15. Sample Decision-Making Matrix
For each type of decision, indicate the level of approval that is required. Note Managing Board Special Unanimous
that some types of decision may be regulated by the Corporations Act. Director (Majority) Majority Shareholder
Approval

Trading

1. Entering into a new contract or varying an existing contract with value of less than $[insert] in the ordinary
course of business

2. Entering into a new contract or varying an existing contract with a value between $[insert] and $[insert] in the
ordinary course of business

3. Entering into an new contract or varying an existing contract with a value of more than $[insert]

4. Entering into a transaction with a shareholder or a shareholder’s related entity

Acquisitions, Disposals and Other Commitments

5. Acquiring or disposing of any asset with a value of up to $[insert] in the ordinary course of business

6. Acquiring or disposing of any asset with a value of more than $[insert] in the ordinary course of business

7. Entering, varying or terminating any lease, contract for sale or other agreement in relation to real property

8. Sale of the company or business or a material part of it

9. Acquisition of any business

10. Material alteration to the nature or scope of the business

 Managing Board Special Unanimous
Director (Majority) Majority Shareholder
Approval

Corporate and Other

11. Changing the company’s name

12. Creating any encumbrances over the company’s assets

13. Changes to the corporate structure of the company (eg formation of subsidiaries)

14. Issuing new shares

15. Conducting a share buy-back or other capital reduction

16. Approval of a new budget or varying the existing budget

17. Approval of a new business plan or varying the existing business plan

18. Employment of any new staff or consultants with a total remuneration package of $[insert] in more (including
superannuation and bonuses)

19. Voluntary liquidation or winding up of the company

20. Finalisation, adoption and approval of the company’s accounts

Commercial Legal Solutions

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