What are the key things I need to put in a shareholders’ agreement?
Tuesday, November 29, 2011/
There is no one correct form of shareholders’ agreement and its content will always depend on the circumstances and what the shareholders agree.
Further, different shareholders may want different provisions depending on how much of the company they own. For example, minority shareholders may be more interested in provisions that protect them from being marginalised from decision-making, and majority shareholders may be more interested in provisions that enable them to ensure they are not held to “ransom” by the minority.
From experience, founder shareholder agreements will also differ from shareholder agreements involving subsequent external investors.
Having said that, some of the usual matters that a shareholders agreement ought to cover are:
The shareholders’ agreement should specify how the shareholders fund the acquisition of their shares. For example, some shareholders may contribute cash funding to subscribe for the shares, whereas other shareholders may transfer IP to the company in exchange for their shares, or others may contribute services in exchange. Shareholders may also decide shares are not all issued to the shareholders at the same time and that shares may be vested or issued over a period of time.
The shareholders’ agreement should specify their rights (if any) to appoint directors, the circumstances when they may lose that right (such as if their shareholding drops below a percentage) and provisions so that other shareholders may not remove another shareholder’s appointed director.
Management, obligations and information
The next important area to cover is management and shareholder obligations. The shareholders’ agreement should specify how the company would be managed and what type of decisions require either a majority (50%), special (75%), unanimous (100%) or other approval. For example, certain significant decisions of the company may require unanimous approval rather than a simple majority to ensure that the interests of the minority shareholders are not ignored. The flipside of this is that certain decisions may be effectively “vetoed” by the minority. Therefore the shareholders should also consider appropriate methods for resolving deadlocks and disputes.
The roles and obligations of the shareholders should also be spelt out so that each shareholder is clear what is required of them and the level of commitment. Further, the shareholders’ agreement should provide for rights to access information and financial reports so that shareholders (particularly minority or those without director appointment rights) are clear what they are entitled to receive.
Dividends and financing
The shareholders’ agreement should specify the circumstances when dividends may be payable, such as whether or not past shareholders’ contributions have to be repaid first. Some shareholders’ agreements may also provide for broad terms on which shareholders have “first rights” to provide further funding before the company seeks external funding.
Transfers of shares
These are critical in a shareholders agreement, and usually include a set of pre-emptive rights, and “drags”, “tags”, “come along”, “me too” or other similarly named clauses that broadly provide for circumstances under which certain shareholders may require other shareholders, or are required by other shareholders, to participate in a sale to a third party. Shareholders may also consider whether a shareholder must transfer their shares if they no longer participate in the management/operations of the company, and if so, whether all or some of their shares are transferred and at what value.
The shareholders’ agreement should also make clear and identify a general exit strategy, which could be a buy-out, listing, sale of business, as well as provide for what would happen if certain shareholders want to exit, and the value at which they may exit.
The shareholders’ agreement should set out a list of events of default and the consequences of default by a shareholder, including whether that shareholder is forced to transfer their shares, and if so whether the valuation would be at market or “fire sale” value.
Deadlocks and disputes
The shareholders’ agreement should set out the consequences if there is a deadlock or if a dispute cannot be resolved. Provisions that are sometimes seen in shareholder agreements include “shotgun” provisions where a party specifies a price at which it is willing to buy-out or be bought-out by the other shareholders. Other provisions include put and call options or sometimes even a forced wind up of the company.
The above is really only a sample of some of the clauses that would be found in a shareholders’ agreement. I know many lawyers have their own favourite form and checklists (I certainly do), so your best bet is to speak to a lawyer to see if you can get a more complete list of things to consider.