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1️⃣ A Shareholders' Agreement governs shares and other securities issued by a company; or
2️⃣ A Unitholders' Agreement governs units and other securities issued by a unit trust of which a company is the trustee.
Both our Shareholders' Agreement + Unitholders' Agreement use Embedded Lawyer-Logic.
The following features are standard inclusions:
✅ A full-form, top-tier-quality Shareholders’ Agreement or Unitholders’ Agreement that automatically adapts to govern securities issued by a company or a unit trust;
✅ Meticulously crafted to standards that meet or even exceed those of the largest Australian and international law firms;
✅ Pre-emption rights on transfers and new issues of securities, whilst seamlessly and ingeniously handling permitted transfers to related parties;
✅ Sophisticated terms (eg, tag-along and/or drag-along rights) can be added in just a couple of clicks, with succinct but helpful explanations along the way …
✅ We have made amendments to allow for the issuing of securities through our Employee Option Plan [Tax-Deferred Scheme] (EOP) without triggering pre-emption rights;
✅ The definition of "Related Entities" includes the Directors of Corporate Shareholders or Unitholders; and
✅ Non-compete, Confidentiality and Non-Disparagement clauses require the parties to ensure their Related Entities comply with these provisions.
This approach introduces the concept of "Key Securityholders" who are defined to be Shareholders or Unitholders who, together with their Associates, hold above a specified percentage of the voting power.
Key Securityholders are granted the following special rights:
⚖️ Each Key Securityholder has the right to appoint one Director; and
⚖️ Reserved Matters require the written approval of either a majority, or all, of the Key Securityholders.
This creates a very binary system where investors either qualify as Key Securityholders and have lots of power, or don't qualify and have none.
The more traditional approach allows all Shareholders/Unitholders to vote on Reserved Matters.
When you select the traditional approach, you can specify the following 3 levels of approval:
1️⃣ Simple Majority Matters (>50%);
2️⃣ Unanimous (100%); or
3️⃣ Special Majority Matters, where you can specify any percentage (eg, 65%, 85%, etc).
Under the traditional approach, the Agreement will be silent as to Director Appointment Rights.
Imagine a company that has 1 x 60% Shareholder and 4 x 10% Shareholders:
➲ Under the Key Securityholder approach with the threshold set at, say, 40%, the 60% Shareholder has total control, unless the other Shareholders combine, in which case they gain total veto power.
➲ Under the more traditional approach, the 60% Shareholder will have total control over Simple Majority Matters, and every Shareholder will have veto power over any Unanimous Matters. The Special Majority threshold could be set at, say, 60%, giving the 60% shareholder control over those matters until they are diluted, or at, say, 70%, in which case at least one other shareholder will need to agree.
This example shows how easily you can add flexibility and nuance regarding approval requirements for Reserved Matters in this Agreement.
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Tag-along rights give non-selling securityholders the right to sell alongside the selling securityholder (ie, the selling securityholder can't complete its sale unless the proposed purchaser also offers to buy out the tagging securityholders).
Drag-along rights give the selling securityholder the right to force the non-selling securityholders to also sell to the proposed purchaser.
This is particularly important where the proposed purchaser will only complete if it gets 100% ownership.
Depending upon the terms of your Shareholders' / Unitholders' Agreement, generally both Tag-along and/or Drag-along rights apply in the event of a proposed sale of shares by a securityholder.
Generally tag/drag rights will only apply:
✅ After the transfer pre-emption provisions have been followed;
✅ If the remaining securityholders do not offer to purchase all of the sale securities;
✅ If the seller then elects to sell all of the sale securities to a bona fide third party; and
✅ If the size of the proposed sale exceeds specified thresholds.
If there is no Shareholders' / Unitholders' Agreement, then the above tag-along / drag-along rights will not be able to be exercised.
Once there are multiple Shareholders / Unitholders it is often too late to get them all to unanimously agree to enter upon agreed terms of a Shareholders' / Unitholders' Agreement.
The ideal time to establish these important rights is in a Shareholders' / Unitholders' Agreement entered at establishment.
That is, before more than 1 Shareholders / Unitholders subscribe for securities.
If you would like the tag/drag rights to apply in the above and/or any other circumstances, we recommend you obtain legal advice at the time the Shareholders' / Unitholders' Agreement is being drafted.
Tag-along rights will apply if a proposed sale would result in a third party acquiring a certain level of voting power or more.
Please note that, since the threshold is linked to voting power, a choice of 100% can make sense where the intention is to permit the holders of non-voting securities to tag along in an exit by the holders of all voting securities.
Voting power threshold for tag-along rights is typically 80-90%.
This is a percentage of the total securityholder voting rights.
The tag-along rights will only apply if the sale would result in a third party acquiring this level of voting power or more.
Voting power threshold for drag-along rights is typically 80-90%:
This is a percentage of the total securityholder voting rights.
The drag-along rights will only apply if the sale securities carry in total this level of voting power or more.
Credits:
This FAQ was created by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.
Important Notice:
This FAQ is intended for general interest + information only.
It is not legal advice, nor should it be relied upon or used as such.
We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.
Key Person Insurance or Buy/Sell Insurance (or in the case of a Partnership Agreement, Partnership Buyout Insurance) provides the funds needed for the remaining owners of a business/trust to:
✅ Takeover or purchase the exiting owners share; and/or
✅ Have access to the required funds to replace the Key Person or recover from the loss of the Key Person from the business …
In the event of their death, total and permanent disability, or severe illness/trauma such as heart attack, stroke, cancer and/or paraplegia.
This type of insurance cover helps the business continue running with minimal disruption.
For the departing person or their estate, this insurance assists them to receive the agreed (normally market value) of their shareholding in return for transferring their business share to the remaining owners of the business/trust, or terminating their Employment / Independent Contractor Agreement.
The Best practice within a Shareholders' or Unitholders' Agreement is to include terms that ensure life, permanent disability + trauma insurance is taken out in relation to all of the Securityholders.
The company or unit trust pays the annual insurance premiums.
Then, if a Securityholder is required to offer its securities for sale to the remaining Securityholders as a result of death, permanent disability + trauma sufficient to be covered by the insurance policy, the proceeds of the insurance policy are used to assist the remaining Securityholders in buying those securities.
The directors or trustee/s determine the amounts for the insurance policy from time to time, with the consent of Key (that is the majority or controlling) Securityholders.
In our Shareholders' or Unitholders' Agreement, by default, the death or incapacity of a Securityholder will not trigger a right for the other parties to buy out that Securityholder.
If you choose to add our Best Practice Buy/Sell Insurance provisions to the Shareholders' or Unitholders' Agreement, then death/incapacity will be added as a trigger event requiring the affected party to offer its securities for sale to the remaining Securityholders.
The potential for future ownership changes, and triggered tax implications {including income tax, capital gains tax, and fringe benefits tax) should be considered before final arrangements are made.
Credits:
This FAQ was created by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.
Important Notice:
This FAQ is intended for general interest + information only.
It is not legal advice, nor should it be relied upon or used as such.
We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.
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