Question: Do we really need a Shareholders Agreement (SHA)?

Short Answer: Yes

Main reasons for a SHA:

➢ The process you go through in doing the agreement forces you to think and talk through all the major scenarios you may face in your partnership. This assures you have a complete and common understanding, avoids unspoken assumptions, and resolves many potentially contentious issues, at the beginning of your business relationship.

➢ You cannot count on your partner always being the person that you will have to deal with. For example, he or she may die and you may have to deal with his or her spouse. You must have a clear record of what the partners agreed to for these other people to understand and implement if they come along.

➢ No partnership lasts forever. If it breaks down or one partner wants to end it, there needs to be a process to unwind it quickly, fairly and as cheaply as possible, and without destroying the value in the underlying business.

➢ A good shareholders agreement is your success plan, it addresses how important matters are going to be addressed when you succeed (e.g. distributing profits, cashing in).

The Business Questionnaire:

A non-exclusive series of questions below gives some insight into the types of questions / considerations and / or matters that may need to be addressed in a well-constructed SHA:


What is the business?

Is it existing or a start-up?

If existing, what has each shareholder contributed so far? Have they been fairly rewarded? Does the existing share structure fairly reflect those contributions?

What adjustments need to be made?

What vision do you have for its future?

What are the key issues related to operating and building the business?

How is the business going to make money for the shareholders? Giving them jobs? Paying them profits annually? Building a valuable business that can be sold at a later date?

How long do the shareholders plan to be involved in the business operationally? Marshall Lawyers WA Pty Ltd Liability limited by a scheme approved under Professional Standards Legislation


Will the shareholders ultimately sell the business? When? To whom? Or will they simply wind it up? Or will they pass it on to their children or other family members?

Is there a business plan? If no, why not/when will there be one?

What must the shareholders agreement do to support the business vision/plan set out above?

Shareholder details:

Full names, including corporate names if corporations?

Share structure: have types and attributes of shares been agreed to? Special classes of shares? Has each shareholder consulted his or her accountant in that regard?

Number of shares each shareholder is to hold, class of shares they hold, amount paid or to be paid for their shares?

Are all shares fully paid for?

Are there certain decisions that require unanimous shareholder support? For example, sale of the business, new shareholders, hiring staff, major purchases / sales?

The Directors:

How many directors? How selected? Full names and home addresses? Citizenship?

Will director be paid? Other benefits – car, computer, credit card etc?

What are the obligations of director/s?

Is there a managing director?

How will the company be run on a day-to-day basis?

Financing matters:

How is the company going to be financed?

What are the shareholders putting in?

Is that to be loans or equity?

Are the loans going to bear interest? Are they going to be secured? What are the repayment terms?

What third party financing is going to be used?

What if more money is needed?

Personal Commitment:

What are shareholders to contribute ways other than financing?

Who is working in the business? On what basis? How are responsibilities being divided?

How are shareholder salaries going to be set? Marshall Lawyers WA Pty Ltd Liability limited by a scheme approved under Professional Standards Legislation


What kind of special covenants will apply while you are a shareholder? E.g. non-competition, company owns all inventions etc.

What kind of special covenants will apply after you cease being a shareholder? E.g. non-solicitation, non-competition

Decision Making:

How will decisions be made?

Will there be different kinds of decisions that get made in different ways?

Are there things that could deadlock the shareholders?

Consider both strategic issues (e.g. new partners, buying new businesses, selling the business) and operational (e.g. signing authorities on contracts and bank accounts, ability to make binding commitments on behalf of the company, hiring and firing, purchasing, selling, etc.).

Who will make them? How will voting rights be handled?

What will constitute a quorum of decision makers?

Is the general rule simple majority vote? Or something else?

Are there things you all have to agree on? I.e. that require unanimous approval?

Distributing Profits:

Who will decide when to distribute profits to shareholders and how much to distribute?

Are profits distributed based on shares only, or something else too?

What if you cannot agree on splitting profits? Arbitration? Deadlock?

Resolving Deadlocks & Withdrawal:

How will deadlocks be resolved, if they arise?

Arbitration on some issues? If yes, which ones?

Can a shareholder withdraw from the deal if he/she wants out? If yes, how? If no, what do you do with such a shareholder?

Others forced to buy?

Drag along / tag along: Can a majority shareholder who wishes to sell his/her share force the minority shareholder to also sell their shares? If a majority shareholder is selling his / her shares, can a minority shareholder require the majority shareholder to also negotiate the sale of the minority shareholder’s shares.

Sale of whole business with any shareholder entitled to match good faith third party offer? (Details to be worked out?)

Winding up of company?

Shareholder can sell to third party, with others having right of first refusal? Marshall Lawyers WA Pty Ltd Liability limited by a scheme approved under Professional Standards Legislation


Some combination of above?

How will the shares be valued?

How will the purchase price be determined?

What will be the payment terms?

Any restrictions on going this way? E.g. cannot withdraw within first two years of starting out?

Insurance / death of shareholder: Will the company or individual shareholders hold an insurance policy to buy the shares in the event of death or serious injury of another shareholder? If not, is there a provision for the company to pay the family of the shareholder to acquire the shares?

NOTE: this Marshall Q&A topic is not and should not be considered as or relied upon as legal advice. It is background / general information only.