MyFondia VirtualLawyer
May 3, 2016

What should you consider when drafting a shareholders’ agreement?

It is often not possible or appropriate to agree on all essential and necessary rules relating to the company and the shareholders in the articles of association. The provisions of the Companies Act are also not alone sufficiently comprehensive to regulate the relationship between the company and its owners or the relationship between the owners. As such, it is recommended that the shareholders draw up a written shareholders’ agreement with each other to agree on the rules relating to the company.

I would like to raise the following key points that should be carefully considered when drawing up a shareholders’ agreement:

  • What is the situation in the company without a shareholder’s agreement and after putting a shareholders’ agreement in place? What kind of situation, need, and ownership structure is the shareholders’ agreement being drawn up for? Although shareholders’ agreements are being made in increasing numbers, few people know what a shareholders’ agreement may contain and why one should be drawn up. For example, a shareholders’ agreement in a family business may have very different objectives compared to a shareholders’ agreement drawn up between business partners. A shareholders’ agreement may be used for different aims in a limited company in which the other shareholder is in the minority than in a limited company in which ownership is equally divided among the shareholders. A shareholders’ agreement should always be tailored to the individual situation and needs of the company, which templates often fail to satisfy.
  • What will a certain provision mean from the company’s and individual shareholders’ perspective? It is essential to consider the conditions under which each shareholder becomes a shareholder and what each shareholder expects from their fellow shareholders. You should not agree on responsibilities and duties that in reality are not applicable to the company or are impossible to comply with.
  • What if your company needs additional funding? Do the shareholders have a financial obligation to the company? For example, you should consider whether the shareholders are obligated to offer additional loans, collateral or guarantees to the company.
  • What is agreed regarding the use of funds invested in the company and the economic benefits received by shareholders? Economic benefits in this context mean the distribution of dividends as well as the salary paid to shareholders. Terms relating to other economic benefits can include, for example, various incentive schemes. The requirements for the distribution of dividends have been set in the Companies Act, but it is often necessary to agree on dividend policy within a shareholders’ agreement.
  • What happens if a shareholder wants to leave the company? Do the other shareholders have an obligation or a right to purchase the shares of another shareholder? These objectives can be achieved by agreeing on share transfer restrictions, such as redemption, consent and right of first refusal clauses. If the shareholder is required to dispose of their shares, it is a good idea to also define the criteria for determining the price of shares in these situations.
  • What should be done if disputes among the shareholders are disrupting the company’s activities? Do the shareholders have, for example, a redemption obligation in such a situation? It is important to get to a point where activities do not stand still due to the shareholders’ disputes, but instead a variety of dispute resolution procedures are available.
  • What should be done if a shareholder dies or gets divorced? For example, can heirs act as shareholders? It can be agreed in the shareholders’ agreement, for example, that the estate or the heirs have the right to keep the shares, provided that they commit to the terms of the shareholders’ agreement. Alternatively, the company may, for example, have the right to redeem shares. In case of divorce, it may be justified, for example, to agree that the shareholders have to sign a prenuptial agreement with their spouses.
  • Do the shareholders have the right to purchase shares before anyone else, or the right or obligation to sell shares (right of first refusal, tag along or drag along rights)? It might be important to agree in the shareholders agreement that a transaction supported by the majority of the shareholders can be carried out, even if all the shareholders do not wish to sell their shares.
  • What competition restrictions are agreed? For example, can a shareholder freely compete against the company and is the non-compete clause tied to shareholdings in the company or to the employment relationship? The non-compete clause should not be worded so tightly that in reality it prevents the shareholder from continuing their career after terminating their shareholdings.
  • How can shareholders obtain information about the company? According to the Companies Act, shareholders are only entitled to inspect the company’s public documents, such as financial statements. Therefore, the right to information can be important, for example, to shareholders who do not participate in the management of the company. When granting rights to information you should, however, consider whether this disclosure of information can have any adverse effects on the company.
  • What is agreed about confidentiality? A confidentiality clause in the shareholders’ agreement is intended to safeguard both the company’s and the shareholders’ business and professional secrets. Agreeing on confidentiality is generally in the best interest of all shareholders.
  • What consequences are agreed for a breach of contract? It is often appropriate to decide on liquidated damages. Other possible consequences for a breach of contract are, for example, redemption of shares or transfer of administrative rights.

In general, it is best to draw up a shareholders’ agreement when you set up the company. If new shareholders join the company during its life cycle, they should also agree to commit to the shareholders’ agreement. Often, merely considering things in advance and finding a common goal prevents possible conflicts.

Fondia is hosting a webinar on shareholders’ agreements on 10 May 2016 at 10 am–10.45 am. The webinar deals with shareholders’ agreements from the perspective of small and medium-sized companies. Welcome along! The webinar is in Finnish.