Tricky legal terminology can be confusing, and it is important that shareholders understanding the difference between a deed of accession, a shareholders agreement and a company constitution, if they wish to invest in a company. This Legal Kitz blog will discuss all relevant documents a shareholder should understand.
What is a shareholders agreement?
Before exploring the function and purpose of a deed of accession, it is necessary to understand how it relates to a shareholder’s agreement. Essentially, a shareholder agreement is a contract between the shareholders of the agreement. It provides important procedures, like what occurs when a shareholder decides to leave the business; how disputes and disagreements are to be resolved between the shareholders; what are the voting rights of each of the shareholders; how can the shareholder engage with the directors of the business; how should shares be issued and sold; or anything other matter that may arise. It is a very important document and one that should be drafted carefully, as it is required to be submitted to the Australia Securities Investment Commission upon its completion.
Unsatisfactory shareholder agreements expose businesses to poorly maintaining the relationship with their shareholder, which can then lead to loss of capital and investment. Hence, it is paramount that shareholder agreements operate effectively and efficiently to establish and maintain a strong practice and culture, that allows a business to prosper, grow and succeed.
What is a deed of accession?
A deed of accession is an instrument that can amplify the effectiveness and efficiency of the shareholder agreement by signing up new shareholders, without the need to redraft an agreement each time that a new individual wants to purchase a stake in the business. Thus, when the initial shareholder agreement is made, it is only binding on those shareholders who firstly signed the document. The deed of accession can ensure new shareholders are bound to the shareholder agreement, without the need to re-draft the agreement. Upon signing, the shareholder must adhere to the terms and conditions of the old shareholders’ agreement.
What is a company constitution?
There can be some confusion between a shareholder agreement and the company constitution. A constitution is required by the Corporations Act 2001 (Cth), or the company will rely on the replaceable rules within the Act. Constitutions automatically cover employees, directors, and shareholders. However, the shareholder agreement is separate from this arrangement and does not automatically apply to all shareholders, it only applies to those that have signed it. To read more about the interesting responsibilities a company has to there shareholders, please visit our website. Additionally, we have further explored the difference between investors and shareholders, which can be read here.
Do new shareholders need a deed of accession?
The deed of accession ideally should be signed when the new individual becomes a shareholder. This will ensure that they have the same rights and benefits that their current shareholders have and enjoy. It removes the need to employ lawyers to draft lengthy shareholder agreements, saving money and time. The same deed can be used each time there is a new shareholder who wants to purchase shares.
For example, there are two shareholders; Jack and Sarah, who each hold 50% of shares in the company. Sarah wishes to sell her shares, and Jack has a strong interest in purchasing his shares to become the majority shareholder. Sarah wishes to offer the shares to an external person, David, who is not yet a shareholder. Jack raises a dispute under the shareholder agreement with Sarah, which is resolved by referring to the processes in the shareholders agreement. Upon reviewing the shareholders agreement, it becomes apparent that if a shareholder wishes to leave, they must offer the shareholder to a non-shareholder, for a reasonable amount of time before current shareholders can offer to purchase the share. Therefore, Sarah offers the shares to David who purchases them. To become a shareholder quickly, David signs a deed of accession.
What is the difference between a deed vs an agreement?
A deed is effective and efficient because it does not require consideration to transfer from one party to another like a contract. This means that courts can enforce them, and they are legally binding documents. It is proof of the shareholder consenting to the new obligations under the deed. However, it only has this effect when the document is written in a formal manner and is signed in a particular way by the parties.
What should you do before signing an accession deed?
If you are thinking of becoming a shareholder of the company, it is important to review the shareholder agreement and take note of the obligations that you will be bound by once you sign the deed. If there are any obligations, conditions, terms, or clauses that raises concerns, then legal advice is needed. As discussed in the example, there are processes occur before you become a shareholder. It may not be as simple as purchasing the shares; some shareholder agreements operate in an opposite fashion to the example, whereas other shareholders must be offered the share before they are offered to external purchasers.
The best way to acquire a new shareholder is to send the deed of accession which provide the details of the shares, such as the price, amount of shares and any other relevant information. The deed of accession should be sent back by the purchaser to the seller. After this point, they are obligated to provide the money for the agreed amount.
Once the document is signed, it is important to keep a copy of the document regardless of whether you are the purchaser of the director selling the share to another party. In addition, the Australian Securities and Investments Commission (ASIC) requires notification of the purchase or sale of shares. To find out more about what ASIC requires from this process please visit their website. It is general practice that the company will send back a certificate that shows the number of shares that are owned by the purchaser.
Legal advice
The deed of accession is an important tool for any business to consider when they are dealing with shareholders. It makes the processes surrounding shareholder agreements effective and efficient, so that all parties can get back to the critical task of running the company. Selling shares will become easier with access to a quality deed document. If, however, there are bumps in the road, the deed of accession will obligate the parties to conduct dispute in accordance with the shareholder agreement. If you require assistance with your deed of accession, you should seek legal advice. Legal Kitz offers a FREE 30-minute consultation, to discuss any concerns that may arise. Book here now.