What is a Shareholders’ Agreement?

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


What is a Shareholders’ Agreement

How to create a Shareholders’ Agreement

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Shareholders’ Agreement FAQs

What is the role of a Shareholders’ Agreement?

To ensure that shareholders are treated fairly and that their rights are protected. When creating your agreement, some of the essential provisions to include are:

Name, address, and shareholding of each investor

Details about the holders of each share are essential.

Restrictions on share transfer

If any shareholder wants to leave the company, a Shareholders’ Agreement provides measures to deal with share transfer provisions and restrictions. Generally, there are two options:

Tag-along

When 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., sell their own shares to the same third-party buyer on the same terms.

Drag-along

If a majority of shareholders (or a group of shareholders) intend to sell shares to a third-party buyer, the drag-along provision gives them a right to force remaining shareholders (typically minority shareholders) to sell their shares to the same buyer on the same terms.

Confidentiality obligations

Prevents the disclosure of information regarding finance, sales, and future plans of the company, which might have serious negative consequences for an organisation’s growth.

Founder vesting

It is very common in venture backed startup for the founder to be treated differently from investors. A founder may agree to have ‘vested shares’ which effectively means some or all of the founder’s shares are not fully ‘owned’ by the founder until they have earned them (by working for a set period of time or hitting specific milestones). If a founder leaves a company, the unearned portion of their shares are either canceled or returned to the company.

Shareholder death clause

A mandatory clause that, upon the death or liquidation of a shareholder, ensures their shares remain in the company.

Deadlock clause

A deadlock is when two or two groups of shareholders cannot agree on certain key matters. Deadlock arises when shareholders’ meetings are repeatedly inquorate (not able to proceed) because one group refuses to attend, votes down, or abstains on a resolution proposed by the other group.

Do I need a Shareholders’ Agreement?

Ideally all companies with more than one shareholder should have a Shareholders’ Agreement to regulate the business between them. The agreement will include:

A dispute resolution mechanism

When disputes arise, a Shareholders’ Agreement can be a valuable tool to avoid and manage conflicts without reverting to extreme measures, like dissolving the company.

Investor protection

Investors often require the shareholders to agree to specific provisions designed to protect their position. For example, they might require performance targets, or a board seat on the board of directors. These provisions are often found in a Shareholders’ Agreement.

Confidentiality clause

Shareholders are likely to have access to valuable confidential information about the company. While the general law states that a person who has received information in confidence cannot use it to take an unfair advantage, most are not prepared to rely on this alone. A Shareholders’ Agreement with confidentiality provisions is the best way for a company to ensure information is kept confidential.

How to draft a Shareholders’ Agreement with Zegal

A mutual understanding between shareholders is essential for business growth.

Zegal’s tools and templates can create a well-drafted agreement to help your business thrive and reach its full potential.

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