For those thinking of starting up a company by way of incorporating a partnership or novel processes or ideas to exploit, it must be kept in mind that forming a company could be considered to be entering into a relationship, albeit a financial one, which may have the potential of falling out or causing some grief along the way.

It is important to give consideration to particularly two types of Agreements:

1. Shareholders Agreements;
2. Confidentiality Agreements, especially if there is intellectual property or commercially confidential information being utilised for the prospective company.

Shareholders Agreement

There are many advantages in having a Shareholders Agreement entered into prior to the formation of the company.

Disputes

As with any sort of relationship there may be disputes between shareholders and directors or between directors themselves.  The Shareholders Agreement can provide some established dispute resolution processes or even provide for some disputes to be referred to shareholders for approval or vice versa.

Avoiding Oppression

It is sometimes asserted by minority shareholders that the majority shareholders are not acting in not only the interest of the company, but also which effects them unnecessarily.  The Shareholders Agreement can cover changes to the Standard Articles of Association to allow a minority shareholder to have more say in respect of issues that concern them primarily.  There can also be provisions where the shares are being “taken over” by a third party to protect the interests of minority shareholders.

Deadlock

As with any relationship, sometimes directors and shareholders do not agree on the course of decisions concerning the company.  This may ordinarily result in the company’s business being put on pause until something can be done to resolve the issue.  A Shareholders Agreement can seek to avoid this by providing resolutions in a quick manner for the parties to resolve the issues or to buy each other out.  It is otherwise difficult for such deadlocks to be resolved in accordance with the standard company articles, and thus the Shareholders Agreement would be useful.

Transfer of Shares

It may be considered important that there is some limitation on transfer of shares, especially to third parties.  A Shareholders Agreement can set in train clauses which enable other shareholders to purchase those shares first.  It can also cover that any person acquiring shares in the company will be bound by the Shareholders Agreement as well.

Confidentiality Agreements

These can be very useful in ensuring all parties are aware of what may be regarded as confidential.  How and in what context confidential information can be provided to third parties to enable the company to exploit for that information.  Such Agreements invariably will set out clauses as to damages or remedies that can be sought if the confidentiality is breached, either by damages or the ability to seek an injunction.

The advantage clearly is that all parties are in a better position to understand what is regarded as confidential and will be more mindful of keeping confidential information to the company.

It might seem trite to say that parties should be aware of confidential information being limited in being shared.  It is surprising, however, how often disputes do arise over what is regarded as confidential information, especially if key shareholders/directors leave for whatever reason.  It is therefore best to have a set process in place that makes it abundantly clear to all parties what it is that they can or cannot use in certain circumstances.

If you already have Shareholders Agreements or Confidentiality Agreements in place, it is prudent for these to be reviewed from time to time.  Further, Ryan Murdoch O’Regan Lawyers (RMO) can assist you in drafting Confidentiality and Shareholders Agreements for you if you are minded to form a company or a partnership.

Contact us

If you have questions in relation to Litigation matters, contact us to book an initial consultation with one of our experienced lawyers, and we will provide you with tailored advice with respect to your unique circumstances. call 1800 957 936, email mail@rmolaw.com.au or submit an enquiry on our website.

We are available to meet with you at any of our local offices (Brisbane, Gold Coast, Beenleigh, Cleveland and Jimboomba) or by telephone or video-conference.

This article is for your information and interest only. It is not intended to be comprehensive, and it does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

Roly O’Regan

Director