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What to take into account when drawing up a shareholders’ agreement?

Blogs April 18, 2016

It is not always possible or even practical to agree in articles of association about every shareholder-related rule that is necessary for the company’s operations. What’s more, the provisions of the Limited Liability Companies Act are not comprehensive enough to regulate the relationship between, on the one hand, the company and its owners, and on the other, the relationship between the owners. We recommend that the shareholders conclude a written shareholders’ agreement among them to agree on the ground rules regarding the company.

Key points to be adressed

1. Situation and needs of the company

What is the situation in the company without a shareholders’ agreement and if a shareholders’ agreement is made? For what kind of a situation, need, ownership structure is the shareholders’ agreement being made? Even though more and more shareholders’ agreements are made, few people know what it may include and why one should be made in the first place. A shareholders’ agreement in a family business, for example, may have very different objectives than one concluded between entrepreneur partners. A shareholders’ agreement may also seek to address different things in a limited liability company in which one shareholder is in a minority than in a limited liability company in which ownership is divided equally among the shareholders. A shareholders’ agreement should always be tailored to meet the company’s situation and needs. Model templates rarely meet all the needs of any company.

2. Expectations of shareholders

What will a specific provision mean from the viewpoint of the company or an individual shareholder? The key question is under what conditions will anybody want to become a shareholder and what each shareholder expects from the other shareholders. There is no point in agreeing on responsibilities and obligations that are unsuitable for the company or cannot be complied with.

3. Policies for extra funding

What to do if the company needs extra funding? Do the shareholders have a funding obligation regarding the company? You should consider, for example, whether the shareholders have an obligation to offer extra loans, guarantees or securities to the company.

4. Use of invested funds and financial benefits

What is agreed on the use of funds invested in the company and the financial benefits available to the shareholders? By financial benefits we here refer to distribution of dividends and salary paid to the shareholders for their work. Other provisions on financial benefits may include various incentive schemes. The conditions for distribution of dividends is prescribed in the Limited Liability Companies Act, but it is often necessary to agree on the dividend distribution policy in the shareholders’ agreement.

5. Shareholder exits

What will happen if any of the shareholders wish to leave the company? Do the other shareholders have an obligation or the right to buy that person’s shares? These can be resolved by agreeing on share transfer restrictions, such as redemption, consent and prohibition clauses. If shareholders are required to give up their shares, it would be advisable to define how their prices are arrived at in such a situation.

6. Disagreement situations

What to do if disagreements among the shareholders disrupt business operations? Would the shareholders have a redemption obligation is such a situation, for example? It would be important to reach a situation in which the company's operations would not be paralysed because of disagreements. Instead, various methods to resolve them should be available.

7. Death or divorce of shareholder

What to do if a shareholder dies or divorces? Can the heirs, for example, act as shareholders? A shareholders’ agreement may state, for example, that the estate or heir may keep the shares provided they comply with the terms of the shareholders’ agreement. Alternatively, the company may be given the right to redeem the shares. In case of divorce, it may be justified to require that shareholders have made a prenuptial agreement.

8. Acquisitions

Do all the shareholders have the right of pre-emption or drag along right or obligation? These conditions may be included to ensure that an acquisition supported by the majority of the shareholders will go ahead even if not all shareholders were willing to sell their shares.

9. Non-competition obligation

What is agreed on non-competition obligation? For example, is a shareholder free to compete with the company's operations and does a non-competition obligation apply to the role of being a shareholder or an employee? The non-competition obligation should not be formulated to be so strict that it in effect prevents a person from continuing to work in the same industry when no longer a shareholder in the company.

10. Access to information

How can shareholders receive information about the company? According to the Limited Liability Companies Act, a shareholder is entitled to view only the company’s official documents such as the financial statements. As a result, right of access to information by shareholders who are not involved in the company’s management may be important to them. However, when granting right of access to information it should be considered whether allowing certain shareholders access can have adverse effects on the company.

11. Confidentiality

What is agreed on confidentiality? The purpose of confidentiality clauses in shareholders’ agreements is to protect the business and professional secrets of the company and the other shareholders. Agreeing on confidentiality is usually in the interest of all shareholders.

12. Consequences of contract breaches

What is agreed on consequences in contract breaches? It is often advisable to agree on contractual penalties. Other possible consequences for contract breaches may include various redemption orders or loss of right to own company shares.

To conclude

Usually, the best time for concluding a shareholders’ agreement is when the company is established. If new shareholders are introduced, they should also be committed to the shareholders’ agreement. Often just thinking about various eventualities and finding a common goal helps to prevent any disputes.

We also offer our customers a Startup shareholders’ agreement product for a company in which the shareholders (2–7) work at the company (no external investors, business angels or advisors). This is a fixed-price service, as a result of which the customer will receive an inexpensive shareholders’ agreement that meets their needs.