MyFondia VirtualLawyer
October 26, 2016

A shareholders’ agreement will not create your company’s success overnight, but it will save your company from a looming catastrophe

Here is the situation: you and a couple of friends – former or new colleagues, promising business partners – have had the greatest business idea ever and decided to go into business together. You have just set up a limited liability company; you may already have an office, perhaps a few employees? Business cards have been printed and a website set up. Sales work is already well underway. What more could you want, apart from paying customers and a rapid increase in the value of the company?

If you asked business lawyers for their opinion, I bet my hat that nine out of ten lawyers would immediately shout “a shareholders’ agreement!”

Early stage companies’ shareholders’ agreements have been discussed a lot in the start-up frenzy of recent years. However, it is still unclear to many new shareholders why a shareholders’ agreement is required in their company – except that one is supposed to be made as your friends’ company also made one. It may also be unclear why a lawyer charges a hefty fee for drafting such an agreement when the Internet is full of free templates, which could be utilised straight away.

“Well planned is half done”, as we say in Finland. The use and value of a shareholders’ agreement therefore really lies in how if forces the company’s owners to sit down together at the outset and think about the organisation of the company’s management, funding and ownership in the future. The agreement also includes provisions for the unfortunate, but very possible option, that there is a dispute about the management of the company. The best shareholders’ agreement is one that has been sufficiently thought through in advance so that it covers the different future scenarios of the company as thoroughly as possible and provides clear, unambiguous instructions for such instances – it thus prevents bickering in advance. For this reason, you should spend some time on the shareholders’ agreement in the early stages of the company, even if it feels like this is time away from other essential initial tasks.

One thing that is often raised by shareholders when a shareholders’ agreement is being drawn up is how should the fair value of the company’s shares be determined. This is a reasonable concern to have, as a shareholder is understandably interested in the value of his/her investment in the instance that shares are sold or otherwise transferred. However, I would argue that before getting as far as the valuation of shares, the shareholders’ agreement has a more important purpose as a guarantor of the company’s value: it ensures that the company’s business idea really belongs to the company and is adequately protected. In an information-based work society, the value of many growing companies depends largely on the know-how of its founders and on intangible rights that they have created through business. The shareholders’ agreement guarantees that these are included, at all times, in the company’s assets, which all shareholders have a right to in accordance with their ownership.

Although the same fundamental questions of existence gnaw at all new companies, different companies require different answers to these questions. While in one start-up a strict, broad and long non-compete clause is a lifeline for the whole business, another company might want to give its shareholders a right to their own side projects. After thinking about these questions, these variable answers should then be transferred onto paper in the form of an agreement – and here is when a billing lawyer enters the picture. A general template taken from the Internet may not fit the business operations of a real company very well. In the best-case scenario, a lack of agreement is mainly a matter of preference, however, in the worst-case scenario, it can cripple the entire company when a point in the agreement is not at all valid or is being argued in the costly court of arbitration as being open to interpretation or unclear.

As a corporate lawyer would say: a shareholders’ agreement will not create your company’s success overnight, but it will save your company from a looming disaster. I highly recommend that all owners of new limited liability companies get together with plenty of time, as well as record the company’s management structure in the form of an agreement – it will always be worth it before long, and the price is not excessive when it buys a better nights sleep.