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What is a Shareholders’ Agreement?

  • 4 min read

A shareholders’ agreement is a contract between a company’s shareholders that outlines shareholders’ rights and obligations. A shareholders’ agreement is a very useful document, particularly for newly formed companies.

Friends, business partners & family members often embark on a business venture together. Professional, personal and family relationships are powerful positive forces that bring people together in a business venture. When a new company is formed, the founding shareholders are typically very optimistic about working together and the positive outcome of the business ventures.

Many times people forget to write down what they agreed to do together and who is responsible for what. What happens if there is a disagreement? What happens if one of the founding shareholders stops contributing to the venture, gets bored or decides to leave?

A shareholders’ agreement is the answer to the above questions. This document, which can be as simple or as complicated as you would like, defines the basic ‘rules of working together’. A typical shareholders’ agreement will answer some of the questions that you don’t want to think about when you are super positive about your venture and everything is going great.

It is a good idea to have one in place so that if things don’t work out, you may still be able to resolve any differences in an amicable and pre-defined way, that may diminish the impact on your friendship, professional or personal relationships. Ideally, you will never have to rely on the shareholders’ agreement, but you will be glad you have one in place should the circumstances require it.

What should a shareholders’ agreement contain?

A shareholders’ agreement will usually contain the following five items:

  • Shareholders’ rights & obligations (ideally a simple and precise description)
  • Shareholders’ rights in relation to share sales or transfers
  • Company’s operational rules (in addition to the Articles of Association)
  • Define important decisions & how they are to be made
  • Define what happens to a shareholder’s share ownership if one of the shareholders leaves or stops contributing to the company
  • Competition restrictions (e.g. if one of the shareholders leaves the company, then they may be prevented from directly competing with the company for a period of time).

A shareholders’ agreement may also be used to protect the rights of the minority shareholders (those who own less than 50% of the company) in relation to the company’s activities. Among minority shareholder provisions a shareholders’ agreement may include:

  • Director appointment & removal
  • Borrowing money
  • New share issue

There are also additional provisions that may be included that regulate certain rights when another person or company wants to buy shares in the company or a shareholder may want to sell shares in the company. These are often called ‘share transfer’ provisions.

What are tag-along rights?

Tag-along rights are shareholders’ rights to sell shares when another shareholder gets an offer for their shares. Imagine if someone offers to buy out one of the shareholders, but not others. The remaining shareholders may not be very happy. Tag along rights basically say ‘if any shareholder gets an offer for their shares, then that offer is available to all the shareholders in proportion to the % of the company that they own.’

What are drag-along rights?

Drag along rights are majority shareholders’ right to ‘drag’ the other shareholders to sell the company if someone wants to buy the company.

Do we need a shareholders’ agreement if we are only 2 company founders?

Yes, you should want a shareholders’ agreement if you are 2 company founders. A shareholders’ agreement is particularly relevant for companies where 2 shareholders own 50% each. Imagine what would happen in the event of the dispute? If you don’t have this written down, any disagreements may be exceptionally difficult to resolve in practice (in addition to the emotional and energy drain).

Do we need legal advice or can we use a template shareholders’ agreement?

Ideally, you should always get legal advice when you draft and sign contractual documents. If you have sufficient experience in starting and running companies, you may be in a better position to draft an agreement yourself. We always recommend that companies and shareholders use professional legal and accounting services when running and setting up companies.

Is there a good template for a shareholders’ agreement?

There are many good templates that you can find in the market. Netlawman has a good template that may get you going. Please note, to repeat ourselves, that ideally you get a professional advisor to help you with the shareholders’ agreement.

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