Board composition clauses in shareholders’ agreements
A well drafted shareholders’ agreement will include provisions pertaining the composition of the board of directors. Board composition clauses are essential for determining the governance structure and management of a company and play a crucial role in protecting the interests of shareholders.
Whilst the Corporations Act 2001 (the Act) provides basic framework for company governance, clauses in a shareholders’ agreement can be used to supplement and/or override certain provisions in the Act. A shareholders’ agreement can include provisions which take into account the specific circumstances of the company and relate to the composition and size of the board, the qualifications of directors, the appointment and removal of directors and the responsibilities of directors.
Board size and composition requirements
The size of the board is an important consideration in determining the governance structure of a company.
A shareholders’ agreement may specify a minimum and/or maximum number of directors as well as other matters relating to the composition of the board, including the requirement for certain independent directors. An independent director is someone who is not an employee of the company, does not have any material financial or personal relationships with the company and is not involved in the day-to-day operations of the company. An independent director helps maintain an objective viewpoint during decision-making.
Director appointment and removal provisions
In addition to specifying a minimum and/or maximum number of directors, a shareholders’ agreement may also specify the process for appointing those directors. This might include a requirement to vote by a specified majority of shareholders or the right of a particular shareholder(s) to appoint a director. A shareholders’ agreement may also set out the conditions under which directors can be removed, such as by a vote of no confidence by the shareholders or a breach of the agreement itself.
Director qualifications and expertise
Another purpose of a board composition clause is to set out the qualifications and expertise required of directors. This may include a requirement for a certain level of education, experience or skills, or a requirement for directors to have specific industry expertise. These provisions are important in ensuring that the board has the necessary skills and knowledge to effectively govern the company and make informed decisions.
Board succession planning
Board succession planning is the process of planning and preparing for the replacement of directors, either due to retirement, resignation or death. A shareholders’ agreement may include clauses to this effect, including a requirement for the board to periodically review and update its succession plan, or a requirement for the appointment of replacement directors in the event of a vacancy on the board.
Director compensation and benefits
Clauses relating to director compensation and benefits may also be included in a shareholders’ agreement. For example, there might be a requirement for the approval of director compensation by a specified majority of shareholders or, alternatively, the requirement for directors to be compensated in accordance with industry standards. These provisions are important for ensuring that directors are fairly compensated for their services in alignment with shareholder expectations.
How can we help you?
Board composition plays a critical role in ensuring the effective functioning and accountability of the board and protecting the interests of shareholders.
Merton Lawyers are experts in corporate governance and preparing bespoke shareholders agreements. To discuss how we can assist you, please contact our corporate team to arrange for an initial consultation.
