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Importance of a shareholder agreement – Directors’ Dispute

Directors usually own shares in the company that they direct.  Without a shareholder agreement in place, current Australian law prevents the company taking back a Directors shares.

If you have a shareholder agreement, the company is able to set penalties for directors that misbehave or maybe in same way damaging the company business.

You could draft your company’s agreement to stipulate that a director resign and sell their shares if for some reason they breach certain criteria within the agreement.  For example, you could have your company’s shareholder agreement state that a breach include:

  1. Investing in a competitor
  2. Advising a competitor
  3. Establishing another business in competition
  4. Stealing intellectual property
  5. Stealing money
  6. Not performing their duties

You could then go on to set out penalties in the shareholders agreement for breaching any of the above, such as:

  1. Making the director sell their shares and resign as a director and shareholder
  2. Sell their share back to the company at a discount

Without a well written shareholder agreement, a company can be in a tricky position of a former director still being a shareholder of the company.  This could mean the former director retains voting rights.  This very realistically can have an impact on the direction of the company.

When editing and/or drafting your shareholder agreement, it’s a good idea to seek legal advice.


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