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About


A Shareholders’ Agreement, also known as a Founders’ Agreement, is a contract among founders of a company to regulate their rights as shareholders of the company.

What is a Shareholders’ Agreement?

A Shareholders’ Agreement, also known as a Founders’ Agreement, is a contract among founders of a company to regulate their rights as shareholders of the company.

In a Shareholders’ Agreement, the founders agree on a set of rules for the future transfer of shares and the level of consent required for making major decisions.

A Shareholders’ Agreement protects founders of a business by imposing restrictions on the transfer of issued shares, so that when one founder leaves, the sale of his shares is subject to other founders’ consent or the remaining founders have the chance to buy his shares before someone outside the company does.

What is tag-along option and drag-along option?

The tag-along option is Where a shareholder intends to sell his shares to a third-party buyer, a tag-along option will allow fellow shareholders to “tag along” with the sale, i.e. to sell their own shares along to the same third-party buyer on the same terms. This ensures that where a good deal is made by a shareholder (typically a majority shareholder), remaining shareholders (typically minority shareholders) will be able to exit on the same terms.

The drag-alone option id Where a majority shareholder (or a group of shareholders) intends to sell his shares to a third-party buyer, the drag-along provision gives him a right to force remaining shareholders (typically minority shareholders) to sell their shares to the same buyer on the same terms. This ensures that the third-party buyer will be able to acquire the entire company, which could be crucial in negotiating the sale. The drag-along mechanism is a drastic measure and minority shareholders must understand its implication before agreeing to it.

Share holder agreement checklist:

  • Name the founders.
  • Total issued share capital of the company 
  • All shareholders name
  • Number of directors 
  • Directors will constitute a quorum for a board meeting
  • Shareholder’s death or default.
  • Share option plan
  • Founder vesting

What the benefit shareholder agreement for the company?

  • Disputes: When disputes do arise, there is often little in the general law that is of assistance and sometimes the only solution may be to dissolve the company, even if the company itself is successful. A shareholder’s agreement can be a very useful tool in avoiding and managing such disputes and can include provisions setting out a mechanism for the parties to resolve disputes without needing draconian measures such as dissolving the company. Sometimes to resolve a dispute, one or more shareholders may agree to sell their shares to the other shareholders. A shareholder’s agreement will often include valuation provisions to ensure a clear valuation mechanism for those shares and avoid a further dispute regarding the price to be paid.

  • Investor protection: Investors are taking a risk on their investment as they may not recover the monies which they invested into the company and so they often require the shareholders to agree certain provisions designed to protect their position. For example, they might require performance targets for the company to meet within a given time and if those targets are not met, the investor has the ability to require certain actions to be taken or has the opportunity to take control of the company. These provisions are often found in a shareholder’s agreement.

  • Confidentiality: The shareholders are likely to have access to valuable confidential information about the company by reason of their involvement in the business. Whilst the general law provides that a person who has received information in confidence cannot take unfair advantage of it, most shareholders are not prepared to rely on this alone. A shareholder’s agreement containing confidentiality provisions is the best way for a company to ensure that the shareholders will keep information about the agreement and about the company confidential during the life of the agreement and following its termination.

Key terms

Shareholder’s death or default:

A mandatory offer of shares upon death or liquidation of a shareholder ensures that the shares of the company will remain on the hands of the remaining shareholders. If you wish to provide otherwise, please get lawyers to help. In this Shareholders’ Agreement, fair value of the shares is determined by the auditors of the company; or if the auditors decline instruction, by an independent accounting firm appointed by the company.

Deadlock:

Deadlock is a situation where two shareholders or two groups of shareholders are unable to agree on certain key matters. Deadlock arises when shareholders’ meetings are repeatedly inquorate because one group of shareholders refuses to attend, or when one group of shareholders votes down or abstains on a resolution proposed by the other group.

Founder vesting:

is the concept that a founder’s total ownership in a company is agreed to in the present and earned over time, not that much unlike a salary or other time-based compensation. If a founder leaves a company, the unearned portion of their ownership is cancelled or returned to the company.

Key points included

 

  • Name, address, and shareholding of each investor;
  • Restrictions on share transfer (including the option to include a tag-along clause and/or a drag-along clause);
  • Level of consent required for key business decisions (e.g. adopting business plan, approving any transaction above a certain value);

  • Level of consent required for fundamental decision (e.g. changes to share capital, winding up);

  • Option to include a non-competition clause; and

  • Confidentiality obligation.

  • Founder vesting

  • share holder death clause

  • Deadlock

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