Most business owners believe that nothing will go wrong when they first set up a company with a partner(s). In fact, they are usually confident that because they know each other so well and are therefore unlikely to argue over something that could lead to the company’s demise, it is unnecessary to draft a shareholders’ agreement.
Unfortunately, things don’t always work out like that; changes can and do take place, and business relationships can go sour, even among partners who are friends or relatives. This is why it is essential to have an official binding agreement between business partners, investors and shareholders to ensure that their company will succeed and flourish for a long time to come.
Key Clauses to Include
A shareholders’ agreement is a contract signed by the shareholders of a company. It specifies how the company should be managed, as well as the individual rights and obligations of each shareholder. When drafting this document, there are several important factors to consider.
Director and Management Structure
The shareholders’ agreement should outline the organisational hierarchy of your company and stipulate how it will be managed and governed. The clauses should detail who is in charge of the decision-making process, as well as the appointment and removal of directors.
Buy–sell provisions make clear what shareholders can do when buying or selling their shares under certain circumstances. This may relate to insolvency, disability, death or the retirement of fellow shareholders.
When drafting a shareholders’ agreement, you should discuss how the shareholders will contribute to the company’s capital. The agreement must also specify what the consequences will be if a shareholder does not contribute according to their shareholding.
Share Transfer Restrictions
If you and your original partners do not want outsiders having easy access to your company, you should use the shareholders’ agreement to place certain restrictions on the transfer of shares. This way, you can prevent shareholders from selling or transferring their shares to just about anyone, even your competitors.
So how do you restrict the transfer of shares? A good way of doing this is to state that they must first make an offer to existing shareholders before they find a potential buyer from outside the company.
If not addressed immediately, disputes can put your business at risk. Therefore, your shareholders’ agreement must incorporate a provision that will help resolve disputes and disagreements.
There are various dispute resolution provisions you can include in your agreement. For example, you could add terms regarding seeking third-party mediation when feuding parties cannot agree on an issue. Or, you could give shareholders the option of buying each other’s shares if they fail to come up with an effective solution.
In most cases, and unless otherwise stated, only the shareholders will be privy to the contents of the shareholders’ agreement. In fact, in order to guarantee confidentiality, a provision should be included to this effect. Furthermore, the terms of the agreement can help secure your company’s privacy and protect its patents, copyrights, trade secrets and manufacturing processes, among other matters.
A shareholders’ agreement can also be used to determine when and how often the board of directors and shareholders meet. When drafting the agreement, you should specify the procedures for holding meetings, how they can be called, and how quorums can be formed.
As disagreements can arise when directors and/or shareholders meet, it is good practice to establish when a unanimous vote is required as well as how many votes are needed to pass and approve a resolution. This way, disputes can be prevented if there are differing opinions among the shareholders and directors.
Your shareholders’ agreement should set out the protocols to be followed when issuing or transferring shares to new shareholders. In addition, each new shareholder should be required to sign a deed of accession to ensure that they will comply with the same agreement that binds the original shareholders.
Another provision to include in the shareholders’ agreement is one that will protect the interests of your company. For instance, you may wish to prohibit shareholders from being involved with a competitor or prevent them from taking employees with them if they leave the company.
The shareholders’ agreement must be designed in such a way that deadlocks can be satisfactorily resolved, especially if there is an even number of equal partners. This will help ensure that the business will not be put at risk if the shareholders fail to agree on a particular course of action.
Important Tips and Reminders
Here are some of the most important things to remember when drafting a shareholders’ agreement:
- Ideally, it should be prepared when the company shares are first distributed.
- Compile a list of basic questions you want answered as this will make drafting the agreement much easier.
- You don’t necessarily need a long agreement. As long as it doesn’t favour one party over another and it offers the necessary solutions to settle disputes and resolve problematic scenarios, the length of the agreement is immaterial.
- Be clear and precise, and leave no room for ambiguity or misinterpretation.
- Create a section for word definitions so that shareholders not well-versed in legal jargon will understand the meaning of certain terminology.
When setting up a business, it is essential that you draft a shareholders’ agreement as this will protect your company from any unnecessary risks and dictate how it will be managed. If you need any help drawing up such an agreement, please contact BEB Contract and Legal Services today. We can write a shareholders’ agreement that will be tailored to your exact requirements.