How a Shareholders’ Agreement can save your day!

Shareholder’s Agreement
You’ve just started a startup with a friend or business partner. Having known each other forever, you trust one another and think you make an awesome team. Surely there’s no need for a legal contract between the two of you?

This is the attitude of many small business owners, but if you’re serious about your business, you must have shareholders’ agreement drawn up quickly!

So here is everything you should know about shareholders agreement-

What is a Shareholders Agreement?

It’s a confidential legal contract between business partners which aims to spell out your rights and obligations as a shareholder. Most importantly, it will set out what happens if either one of the partner’s wants to leave the business. For example, if your business partner wants to leave, will you have a right to buy his or her shares, and if so, how will the price be decided?

What should the Agreement contain?

The content of shareholders’ agreements will depend on the type of startup or company meant to be regulated. It can cover various issues, from day-to-day operations, organization processes, business activities and relationships between the shareholders. It is important to note that shareholders’ agreements are independent contracts, which means that they are a different type of document that can co-exist with the articles of association of a company.

What are the main clauses in a Shareholders’ Agreement?

The content of a shareholder’s agreement will mainly depend on the type of startup, nonetheless, here are the main clauses that every shareholders’ agreement must have-

General Clauses: It will have to include the purpose of the document, as well as indicate the previous agreements made between the parties, indicating their roles, the duration of the contract, law and jurisdiction applicable.

Operational and organization clauses: It will regulate the legal structure of the company, appointment of directors and their limitations, the shareholders’ contributions, the roles and functions of each party, dedication, obligations and vesting.

Clauses regarding shareholders rights and obligations: It will establish the decision making process, how the shareholders’ meeting will take place, how they will vote, and the compensation that the founders or key collaborators will receive.

Protection clauses: Founders’ commitments, vesting conditions, non-compete clauses, non disclosure agreements, etc.

Exit clauses: It will regulate the economic terms of a future investment in the company or possible exit, drag and tag along clauses, buy out, etc.

Why is it important to have a Shareholders’ Agreement?

A shareholders’ agreement can help to foresee certain aspects that can affect negatively the development of the startup. Although a shareholders’ agreement won’t prevent a problem by itself, it will however regulate how the problem can be solved and what actions will have to be taken to solve it.

What are the risks of not having a Shareholders’ Agreement?

Not having a shareholders’ agreement would be like walking a blind eye, not knowing what will happen in specific situations and what steps to take if any issue occurs.

Some of these “what if?” questions might be:

  • What if a founder leaves the company?
  • What if a founder starts another similar project?
  • What if we need a new partner?
  • What if a founder is not dedicating enough time or finds another job?
  • What if a founder is not delivering what he/she was supposed to do?
  • What if there are disagreements between the shareholders?
  • What if there’s a deadlock situation?

Not having a shareholders’ agreement would increase the legal uncertainty for both the shareholders and the company itself.

About the Author

This article has been authored by Ayushi Sharma, Founding Intern at LegalNow.