MyFondia VirtualLawyer
October 8, 2019

What is a shareholders’ agreement?

A shareholders’ agreement is not a public document, so it allows binding agreements to be made between shareholders in a confidential way.

A shareholders’ agreement includes common goals that the company aims to achieve. A shareholders’ agreement is not a public document, so it allows binding agreements to be made between shareholders in a confidential way. Breaching a shareholders’ agreement may result in liability for damages or fines. When used properly, it is a versatile and effective tool in a limited liability company.

What is a shareholders’ agreement used for?

A shareholders’ agreement sets out the common ground rules and should be considered if there are at least two shareholders. It can be used to agree on profit sharing, company financing, non-compete clauses, confidentiality and many other things. An external investor usually requires a shareholders’ agreement to ensure that external funds are used efficiently for business development. A shareholders’ agreement can also be used to specify the position of majority and minority shareholders.

What should and should not be agreed in a shareholders’ agreement?

Investors usually demand an opportunity to influence how the company is being managed. Initial investors want to secure their position and protect their stake in future investment rounds. A shareholders’ agreement often includes restrictions on pledging and the transfer of shares. However, it is not a good idea to aim for unanimous decision-making. For example, a veto can lead to an unpleasant stalemate. An entrepreneur must therefore weigh up the pros and cons of an outside investor.

Use a shareholders’ agreement to agree on the ground rules

A shareholders’ agreement can be informal or even verbal. If all goes well, the shareholders’ agreement will never be needed, but its existence creates a sense of security for the business. However, it is recommended that a shareholders’ agreement is drawn up in writing with the assistance of an expert.

A good shareholders’ agreement is like fire insurance – you may never need it. However, after the fire has been put out it may save your company!