Shareholders agreement for business owners
A shareholders agreement is a key document that helps business owners manage their company smoothly, especially when shareholders disagree. It lays out clear rules on how to handle key issues, avoiding conflicts that can hurt the business. Here’s a simple guide to the most important clauses every business should include in a shareholders agreement.
What the shareholders agreement covers
The agreement should start by explaining that its main purpose is to set out how shareholders will work together and run the company. It should also make clear that these rules will help prevent disputes from disrupting the business.
Share Transfers: Control who owns the business
This section should control how shares can be bought or sold to keep unwanted outsiders from becoming shareholders.
- Pre-emption Rights: If a shareholder wants to sell their shares, existing shareholders should have the first option to buy them.
- Tag-Along Rights: Protect minority shareholders by letting them sell their shares if the majority shareholder sells theirs.
- Drag-Along Rights: Allow majority shareholders to force minority shareholders to sell their shares if the business is being sold, ensuring the buyer gets 100% of the company.
Decision-making rules: Avoid deadlock
To prevent disagreements from stalling the business, the agreement should clearly set out how decisions are made.
- Major Decisions: Some big decisions, like selling the company or issuing new shares, should require a special majority (e.g., 75%) or even unanimous agreement.
- Deadlock Resolution: Include a plan for resolving deadlocks, such as using a neutral third party or mediation.
Dividends and funding: managing money
This part deals with how profits are shared and how the company raises money.
- Dividend Policy: Decide how and when profits will be paid to shareholders.
- Raising Capital: If the company needs more money, the agreement should explain whether shareholders must invest more or whether outside investors can be brought in.
Roles and responsibilities: Clear job descriptions
The agreement should define what role each shareholder plays, especially if they’re involved in managing the company. It should also include rules on:
- Non-Compete Clauses: Prevent shareholders from starting a competing business.
- Confidentiality: Ensure shareholders don’t share sensitive company information.
Exit strategy: smooth transitions
If a shareholder wants to leave the company, the agreement should outline how that process works.
- Right of First Refusal: Give existing shareholders the first option to buy the shares of a departing shareholder.
- Valuation Method: Clearly define how the shares will be valued when a shareholder exits.
Dispute resolution: solving problems without court
To avoid costly and time-consuming lawsuits, the agreement should include a clear process for resolving disputes.
- Mediation and Arbitration: Consider using private mediation or arbitration to resolve conflicts quickly and quietly.
- Governing Law: Specify which country’s laws will apply to the agreement.
Drag-along and tag-along rights
- Drag-Along Rights: Allow majority shareholders to force all shareholders to sell if the business is being sold.
- Tag-Along Rights: Protect minority shareholders by allowing them to sell their shares on the same terms if the majority sells.
Confidentiality and non-compete rules
These clauses protect the company’s trade secrets and ensure that shareholders don’t start competing businesses.
A shareholders agreement is essential for keeping your business running smoothly, even when shareholders don’t see eye to eye. It sets clear rules for ownership, decision-making, and dispute resolution. Working with a lawyer to draft this agreement ensures that it covers everything necessary to prevent conflicts and protect your business in the long run.
Contact us and we will help you with your shareholders agreement.