What do I put in a shareholders’ agreement?

A shareholder’s agreement is a valuable contract to set up when a new company is formed as it provides stability, transparency and ensures the company runs smoothly. Most people find the process of creating a shareholders’ agreement a rewarding and valuable one, as they are caught up in the excitement of starting something new. Putting something into writing forces you to consider a raft of ‘what if’ scenarios early on, before problems can arise and cause disputes.

Top 10 clauses to put in a shareholder’s agreement

At Lawbase, we’re experts in business law, and we’ve helped many companies draft and put together shareholders’ agreements which are specific to their needs. What you put in a shareholder’s agreement will depend on how much of the company each shareholder owns and will reflect their interests. For example, minority shareholders will want to include clauses that protect their decision-making power.

Every shareholders’ agreement is different, and they don’t have to be complicated. Sitting down with your founding shareholders and asking yourselves the following questions will set you in the right direction.

Who is going to run the company?

In this clause, you should stipulate how many directors you’re going to have and who they will be. You should also carefully describe their job description, detailing how much decision-making power they have, how they are appointed and what rights shareholders have to appoint or remove directors.

How is the company going to be run?

This will describe the day-to-day running of the company and how decisions are made. It should provide a break-down of what type of decisions require a majority (50%), special (75%) or unanimous (100%) vote.

How will your shares be bought and sold?

One of the most vital clauses, this clause sets out how shares are bought and sold, who can buy them and the rights and obligations of the shareholders.

What happens if a shareholder wants to sell?

The time may come when a shareholder wants to sell or to wind up the company. In this instance, having a clear exit strategy is essential.

What restrictions do you want to place on share transfers?

This clause ensures that shareholders retain control over the transfer of shares and typically includes restrictions such as: right of first refusal, right to refuse transfer and board consent to transfer.

How will you deal with disputes?

This is one of the most important questions for the founding shareholders to ask each other, as disagreements do happen. Every shareholders’ agreement should outline a process for how to deal with disputes. Lawbase has worked with many companies trying to resolve disputes, and we know how vital it is to have robust procedures in place right from the start. If you put down in writing the worse-case scenarios, it can help you avoid problems before they even arise. If a dispute becomes unavoidable, then you have a clear process for how to resolve it.

If the shareholders become deadlocked, what will you do?

This is another essential clause to put in a shareholders’ agreement, especially for smaller companies. If shareholders become deadlocked, how are you going to proceed? If your company has only two shareholders, this is particularly important and can help avoid expensive legal fees.

How will you fund your company?

If you need more money, it’s important to discuss where it will come from. Will you go to an external source first, or ask the shareholders for funding? If you decide to issue more shares as a source of funding, how will this affect the existing shareholders’ percentages?

What we’ve covered in this blog is general information and we recommend that you work closely with an expert in business law when drafting your shareholders’ agreement. Lawbase are experienced and knowledgeable in business law and we can advise and guide you through the process. The cost of setting up a shareholders’ agreement should be viewed as an investment, as it will give your company stability and could help prevent expensive legal fees in the future.

Contact the team at Lawbase today – we’re happy to answer any questions you have about what to put in a shareholders’ agreement.