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.

To ensure that shareholders are treated fairly and that their rights are protected.


Shareholders’ Agreement Template

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Shareholders’ Agreement FAQs

What is a shareholders agreement?

A Shareholders’ Agreement is a contract among the founders of a company to regulate their rights as shareholders of the company. To ensure that shareholders are treated fairly and that their rights are protected. It is also known as a Consortium Agreement or a Joint Venture Agreement.

What is the role of a Shareholders Agreement template?

shareholders agreement

A shareholder Agreement helps to ensure that shareholders are treated fairly and that their rights are protected. It also helps in mitigating the risk of any conflicts that could occur in the future. The agreement helps facilitate cooperation among the shareholders and ultimately aids in increasing the likelihood of a company becoming successful. When creating an agreement, some of the essential provisions to include in a shareholders agreement template are:

Name, address, and shareholding of each investor:

Personal and identifying details of the shareholders need to be mentioned along with their duties, responsibilities, and entitlements.

Detailed governance and management provisions:

A shareholders’ agreement needs to have governance provisions about how the company will be managed. This can include details of how officers will be appointed, how official meetings such as board and shareholders meetings will operate as well as how decision-making will take place among the shareholders.

Restrictions on share transfer:

  • If any shareholder wants to leave the company, or sell their half of the share then, a Shareholders’ Agreement provides measures to deal with share transfer provisions and restrictions. For instance, this can include clauses such as stating that the first right to purchase a shareholder’s share will be given to existing shareholders and only then to third parties. 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 a venture-backed startups 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 is either canceled or returned to the company.

Shareholders’ death clause:

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

Deadlock clause:

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.There needs to be provisions on how a deadlock will be resolved so the company can move forward.

Restrictive covenants:

Shareholders of a company are restricted from becoming a shareholder or competing or enticing away customers during the period they are shareholders as well as after a certain period of time after they cease to become one in a company by the restrictive covenant clause.  

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.

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.

Who needs a Shareholders’ Agreement?

Ideally, all companies which have more than one shareholder should have a Shareholders’ Agreement in place to regulate the business and have the responsibilities and rules for running the company pinned down in writing. Some benefits of having a shareholder’s agreement are:

  • 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. It can be a tool to help tread the sensitive topics with concrete pre-determined measures.

  • 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.

Are shareholders’ agreement legally binding?

Shareholders’ agreements are contracts. However, for them to be legally valid and binding, it needs to fulfill certain contractual requirements.

Can Shareholders Agreements be reviewed or changed?

Yes, while shareholders agreement provides a solid foundation for businesses to move ahead, their terms can be reviewed and changed in the future, if all the parties onboard agree on the changes. The needs of company, business and even investors is ever changing and it is only apt that the agreements are changed accordingly as well.

How is shareholders agreement different from Articles of Association?

While an article of association is a public document, a shareholders’ agreement is a private one that is signed between the shareholders of a company. Both are used to regulate the actions of a company and should be consistent with each other.

Conclusion

Shareholders agreement helps to define the relationship of shareholders in a company. Having a shareholder’s agreement in place is not a legal requirement or compulsory. However, having one in place can save you a lot of trouble and time in the future. It has clear guidelines in place for how the shareholders should conduct their roles in the company.  It is also not a public document and can be a confidential contract.

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