I asked AI to draft me a shareholder agreement (purely for the purposes of research of course). I wanted to see what is produced and whether or not it would be fit for purpose.
It is no surprise that I can confidently say that without a doubt relying on AI to draft an important business document is completely and utterly pointless. You may as well not have one at all.
Let’s start with “Transfer of Shares”, AI created this;
- No Shareholder may transfer or sell shares without offering them first to the other Shareholder (Right of First Refusal).
- Any proposed sale must follow a fair market valuation procedure.
Whilst AI is on the right track (unless this isn’t actually what the shareholders want of course) I would expect to see a lot more detail here. How long is the right of first refusal open for? Can the shares be paid for over time rather than a lump sum? What happens if the other shareholders do not want the shares? What happens if a shareholder dies or breaches their legal duties as a shareholder? Valuations of shares are often the subject of disputes between shareholders. Clear provisions are needed to highlight the actual process of valuations to prevent disputes occurring.
Indeed, it did ask me if I wanted further exit provisions and knowing what I know I did then ask ‘what happens upon death?’
When a shareholder dies, without clear provisions, chaos can ensue: ownership may transfer to heirs who have no business knowledge or interest, or disputes may arise between surviving shareholders and the deceased’s estate.
It then went on to tell me what a ‘solid shareholder agreement should cover’, despite not giving me that in the first place. It had to be prompted which isn’t good news when you do not know the risks and what needs to be covered, and why would you?!
For this exercise I also used a split of 70/30 on 2 shareholders. It failed to discuss what would happen if the majority shareholder wanted to sell the business in its entirety and it also decided just 4 areas that needed unanimous votes on.
Engaging a professional like me would ask far more questions about decision making and voting rights.
The non-compete clause needed some work too;
No Shareholder shall engage in any business that competes with the Company during and for [12] months after ceasing to be a Shareholder.
What about clients/suppliers/employees? Intellectual property? What about being the director/shareholder of another business? Tightening up the language can be super important in the event of a dispute.
Interestingly to I asked it whether templates were good enough and this is where I did agree … there were a whole list of reasons why templates were not sufficient and signed off with the below.
Using a DIY shareholder agreement is like putting a Band-Aid on a leaking pipe — it might look fine for now, but it’ll burst when the pressure’s on. << Typo included!
Don’t rely on AI to draft an important document such as a shareholder agreement, arrange a call with us here at BEB. We highlight the risks to your business regardless of the set up and incorporate these into a solid agreement where all parties are protected.