What is a shareholders’ agreement?

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.

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.

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.

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!