Shareholders’ Agreements and Company Constitutions

We have previously written about Shareholder’s Agreementsand what they are. A Shareholder’s Agreement is certainly very important as it deals what each shareholder brings to the table, and more importantly, what happens when there is a disagreement or if a shareholder wants to exit the business. Not having a Shareholder’s Agreement will┬álikely make the exit process more difficult. However what a Shareholder’s Agreement cannot do is to determine how the company is run, who has the day to day responsibilities, who the directors are, and the conduct of board meetings. These are all matters dictated by the Company Constitution.

The Constitution has the effect of an agreement between the company, its members, its directors, and its secretary. A company adopts a Constitution on registration or after registration. If no particular Constitution has been adopted after registration, a default set of rules called the Replacable Rules. These rules are found in the Corporations Act and they deal with a number of topics including:

  • Company Officers and Employees
  • Meetings of Directors
  • Powers of Directors
  • Voting, Resolutions, and Quorums.
  • Meetings of Members
  • Transmissions of Shares on Death or Bankrupcy

A Company can replace some of the Replacable Rules with its own rules or adopt its own Constitution so long as a special resolution has been passed by its Shareholders. If a member is not satisfied with the way the company is being run, and if the company is being run in contravention of its own Constitution, they may be able to bring legal action against the offending member.

A well-run business involving more than one partner should always have both a Shareholder’s Agreement and a Company Constitution.

Where are your personal guarantees?

Personal and Director’s Guarantees

In small business run through a trust or a company, it’s common for your various suppliers and credit providers to ask you as the business owner to provide personal guarantees in support of the business’ credit requirements. The nature of these guarantees are usually that they are unlimited and continuing, meaning that you’ll be personally liable for whatever the business may incur in relation to that creditor while that guarantee is effective.

If you’re not keeping track of where you’ve given these personal guarantees, you could be exposing yourself to unknown personal liabilities now and in the future. What happens if you sell the business or are replaced as a director of the company? The guarantee could still bind you regardless if you don’t take steps to have your obligations discharged in some way. Generally, the terms of the guarantee will advise you how this can be achieved, but in practical terms it might mean replacing your guarantee with another form of acceptable security.

Whatever the case may be, make sure you’re keeping track of your personal guarantees otherwise it might be something that will come back┬áto haunt you in years to come.