A shareholders agreement is an essential agreement for your business. Don’t be misled by its name – a shareholders agreement does more than just formalise an agreement between shareholders. It details many of the core mechanisms that are essential to the ongoing management, decision making and operation of your business.
Overview
A shareholders agreement governs the relationship between a company and its shareholders. A shareholders agreement is particularly important for startups that will have more than one shareholder, either from the outset or at some point in their journey.
In our experience, most startups go through multiple stages of equity raises, so a well drafted shareholders agreement is critical to ensuring all shareholders are clear on their rights and obligations. While the specifics of a shareholders agreement will depend on the nature and requirements of the relevant business, there are some key provisions that all shareholders agreement should address.
1. Shareholder contributions
A shareholders agreement for startups should set out how the shareholders will be funding their shares. Shareholders might contribute cash for their share acquisition, others may be contributing an asset such as intellectual property into the business as consideration for their shares. Whatever the mechanism, it should be made clear within the agreement.
The shareholders agreement can also set out how the shares are to be distributed. For example, where a shareholder’s entitlement to shares arises out of work performed, the shares might only be issued to or vest in that shareholder on the happening of certain events, like the work being completed, or the shareholder being employed for a specific period.
2. Management and decision making
A fundamental aspect of a startup’s shareholders agreement is the framework for decision making. There should be a clear framework in the shareholders agreement for decisions to be made at shareholder level and director level.
These decisions are usually made by general, special or unanimous resolutions which are passed by a vote of the directors or shareholders, and a shareholders agreement provides the opportunity for a company to apportion voting powers on terms that suits it best.
For example, a shareholders agreement might say that a director appointed by the majority shareholder has an extra vote. It might also distinguish between shares that issue voting rights, and shares that don’t.
A shareholders agreement can also designate what percentage of votes is required for different types of decisions. Generally speaking, an ordinary resolution requires 50% of votes, and a special resolution requires 75%, but there will often be circumstances where this does not suit your needs.
For example, a shareholder holding only 70% of the shares may want the ability to pass a special resolution without the supporting vote of minority shareholders. Conversely, a potential investor coming on as a minority shareholder may require that special resolutions cannot be passed without their supporting vote. A bespoke shareholders agreement provides startups the ability to iron out these details and ensure that the voting regime suits its preferences.
3. Dealing with shares
A shareholders agreement should detail how shares in the company will be issued and disposed of. Dealings with shares are one of the most important features of a company, and they are essential for a company to undergo an equity capital raise (read more about that in our article Funding for your Startup), which is necessary for attracting investors. It is therefore important to have robust clauses detailing with a great degree of specificity how shares can be dealt with.
4. Defaults and disputes
Clauses dealing with defaults of the parties and disputes between the parties are also important for a well drafted shareholders agreement. These clauses should set out:
- What happens when a party to the agreement defaults (ie, fails to uphold or breaches) on their obligations;
- How disputes between parties are to be resolved; and
- What happens if a default cannot be remedied or a dispute cannot be resolved.
Preparing your shareholders agreement
A shareholders agreement is a complex, and typically large document. The provisions dealt with in this article are just some of the fundamental provisions that should be included, however, a robust shareholders agreement should go into significant detail on all of these mechanisms, and more.
Here at Allied Legal, we regularly help our clients with preparing shareholders agreements that are tailored to their needs. This ensures that our clients are protected and have the powers they need for their business to succeed on terms that suit them.
