Starting a business is an adventurous journey that entrepreneurs often do not travel alone.

If you have others in your entrepreneurial journey, you must agree on the key rules you will follow, and that’s what a Shareholders’ Agreement can do for your startup company and business partners. 

In this article, we explain what a Shareholders’ Agreement is as well as the common provisions and tips for choosing the best clauses. 

What Is A Shareholders’ Agreement?

A Shareholders’ Agreement – commonly referred to as “SHA” – is a contract between the shareholders of a company and the company. It sets out how the company will be managed and how the shareholders shall relate with each other and the company. 

A Shareholders’ Agreement should not contradict the company’s Articles of Association, and both documents should be consistent and complement each other.

However, because the Shareholders’ Agreement is a private document, it does not need to be filed in Companies House.

why shareholder agreements are important 2

Common Provisions In Shareholders’ Agreement

As with any other contract, Shareholders’ Agreements may vary a lot in their shape and content. Nevertheless, when they aim at SMEs and startups, they usually contain the following provisions:

1. Appointment And Removal Of Directors

Who can appoint and remove the directors of the company?

Does the board have a minimum or a maximum number of directors?

2. Board Decision-making Process

What is the quorum for board meetings?

Does the majority of directors take decisions?

Does any director have veto powers? 

Does a decision require the approval of any specific director (like an investor director)?

3. Reserved Matters / Matters Requiring Shareholders Or Investors’ Consent

Are there any matters the board cannot decide without obtaining the approval of a certain number of shareholders and/or investors?

Related:   Best MBA Programs in the U.S.

If there are, what is the threshold required to obtain such approval and which are these matters?

4. Pre-emption Rights

Will shareholders have pre-emption rights on the issue of new shares or the transfer of shares?
Are there any exceptions to these pre-emption rights (like the issue of shares under an option pool or transfer of shares to a family member)?

5. Leaver Provisions

If shareholders in general and founders in particular no longer work for the company, what will happen to their shares? 

Will there be any difference depending on the reason for the shareholder’s departure?
Will the company or the other shareholders have the right to acquire the leavers’ shares? 

If they will, how many shares will they have the right to buy and at what price?

6. Transmission

If a shareholder dies, what will happen to their shares? 

Will they be transmitted to personal representatives, or will the other shareholders have the right to acquire them?
If the other shareholders have the right to acquire shares of a deceased shareholder, what price will they pay for such shares?

7. Restrictive Covenants / Non-compete Provisions

Will the shareholders, in general, and founders, in particular, be prohibited from working on other projects?

If they will, what will be the extent of such prohibition and for how long will it last?

agreement g94cd127f6 1280

8. Dividends And Liquidation

When and how will dividends be distributed?
If the company is to be closed, will any shareholder have any liquidation preference?

9. Exit Provisions

Will, the minority shareholders, be obliged to sell their shares if the majority shareholders want to do so – i.e. will the majority shareholders have drag-along rights?
Will, a buyer of the control of the company, be obliged to purchase the shares of the minority shareholders – i.e. will the minority shareholders have tag-along rights?

10. Deadlocks And Disputes

If the directors or shareholders cannot reach an agreement on a particular matter, how will they solve the deadlock? Will someone have a casting vote, or will a third party be appointed to decide the matter?
What if there is a dispute that cannot be settled amicably? 

Will shareholders be required to try mediation or arbitration, or shall they resort to the Courts?

Related:   Employee Recognition Ideas for Small Business Startups

LawBite has created a free Shareholders’ Agreement template that contains the main provisions above and can be edited to suit your requirements.

Choosing The Best Clauses

Each and any of these provisions can be addressed in several ways. They can be very well-balanced or more founder or investor friendly. They can focus more on allowing more flexibility to the directors or the majority shareholders or ensuring minority shareholders gets as much protection as possible.

The best approach for you will depend on the circumstances of your company and your relationship with your business partners.

Some provisions are more sensitive to companies with only co-founders as shareholders, while others are standard investors’ requirements. Angel, seed and venture capital investors may also have different requirements depending on the amount invested and their investment strategies.

There is no one-size fits all approach, and you must assess how these provisions should be used – if at all – taking into account your business plan and your agreements with the other shareholders in your company. 

pexels kampus production 8190803

Other Agreements That May Be Signed Together With A Shareholders’ Agreement

A Shareholders’ Agreement usually does not address those instances where shareholders provide services to the company. Therefore, if a shareholder will be an employee or a service provider of the company, a separate agreement should be established to address such employment or provision of services.

Investment and subscription of new shares are topics that should be dealt with separately.

Although some entrepreneurs and investors add these topics into a shareholders’ agreement – and name the agreement as “subscription and shareholders’ agreement”, these matters require a different set of provisions like share price, completion and warranties. 

Wrapping Up

If you’re just starting your company it advisable that you and the rest of the shareholders create an SHA. Once you have this  agreement in place you can focus on making your business successful, with the knowledge your interests are being protected. 

If you need support with drafting your first SHA, LawBite’s team of expert contract lawyers can support with this and with any other legal documentation you might require to start and run your business.