As a commercial lawyer that takes care of doctors, I get a large volume of enquiries about Shareholders Agreements.
A Shareholders Agreement is a critical document if you are a shareholder of a company, with other shareholders. I can hear what you’re thinking well, OF COURSE, a commercial lawyer is suggesting smart doctors have a Shareholders Agreement. But I haven’t always been on the commercial side, I started out as a litigator, and I have seen businesses killed because the shareholders didn’t put thought and consideration into what could (and does) go wrong.
Shareholder agreements are in place to regulate the conduct of the shareholders and apply equally to Pty Ltd Companies as well as Partnerships and other types of entities.
OK, so, if smart doctors need a Shareholders Agreement, what is it and why is it important?
A Shareholders Agreement is a contract between each shareholder of a company. As a shareholder, you’ll know what will transpire when specific events happen and, if you have forgotten what you agreed, you can look it up in the document.
The Corporations Act sets out some fundamental shareholder rights, such as requiring a majority vote to change the share structure, but there are many strategic considerations, operational decisions and risk management factors that can, and should be addressed in a Shareholders Agreement, particularly for medical practices. The Corporations Act alone does not cover these requirements.
As a previous litigator, I’ve been involved in my fair share of cases where I’ve had to fight for the rights of minority shareholders – a situation that is both costly and time consuming for everyone involved. Sound advice and preparation up front can save lots of headaches down the track. I’ve also seen my fair share of amicable relationships turn sour – we are emotional beings after all and I’ve seen years of trust and comradery evaporate in a heartbeat.
Here are the top FIVE things you should think about including in your Shareholders Agreement:
- Get one – if you don’t already. Fixing a problem when it occurs is always costlier than taking preventative measures.
- Your Shareholders Agreement should set out strategic management decisions for the practice. The most substantial portion of your agreement will dedicate how the practice will be managed and how decisions are to be made.
- Your Shareholders Agreement will prescribe the conditions for dividend payments.
- It can also govern Shareholder and Director loans as well circumstances in which the company may enter into other debt arrangements.
- Consider the impact of capital raising and implications on shareholders voting power
What happens when someone wants to exit the Practice?
The most common questions I hear about Shareholders Agreements relate to exit strategy and unexpected exit by a shareholder due to illness, injury or death.
Where a shareholder wants to exit the practice, they can be required to offer their shares to existing shareholders at a specified price. Your shareholders agreement should detail how a valuation of equity will be calculated and how any shared assets such as medical equipment will be handled.
And any shareholders agreement worth its weight in gold will also set out the process of mediation and/or arbitration in the event a dispute does arrive.
Protect Your Practice
Having a water-tight shareholders agreement is like having an insurance policy against the management of your Practice. When everything is going well it’s not something that is often thought about, but when there has been a turn of events or change in circumstances, documents and agreements like this can make a massive difference to the outcome for the business and the personal relationships involved.
Make sure your shareholders agreement covers all the non-negotiables – get your FREE checklist of recommended provisions for a shareholders agreement. Email me here, mentioning this blog.
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* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.