A shareholders’ agreement is a contract which creates rights and obligations for shareholders beyond the basic rights in company law or in a company’s constitution.
The parties to a shareholders’ agreement may be all a company’s shareholders or just some of them. The company itself is often joined as a party to the agreement.
Common rights and obligations in shareholders’ agreements include: the issue and transfer of shares, the composition of the board of directors, minority investor blocking rights, restrictive covenants and dispute resolution mechanisms.
Make sure to consider what to include in your document. The content of a shareholders’ agreement changes considerably depending on the nature of the company. A shareholders’ agreement for a venture capital backed start-up company is very different to a shareholders’ agreement for a joint venture company.
In addition, a company can have more than one shareholders’ agreement in place at the same time. Make sure that agreements do not conflict with each other.
Contents of a shareholders' agreement
Board or Observer Seats |
Rights for certain shareholders to make appointments to the board of directors. This may include a right to appoint an observer. |
Pre-emption over Shares |
A right of existing shareholders to subscribe for new shares or purchase existing shares in priority to third parties. This may be a right of first offer (ROFO) or a right of first refusal (ROFR). |
Tag-Along |
A right for minority shareholders to join in on a sale of shares. This could be any sale or only a share resulting in a change of control. |
Drag-Along |
A right for the shareholder majority to force the minority shareholders to join in on a sale of shares. |
Lock Up |
A restriction on certain shareholders transferring their shares. |
Veto Matters |
A right for certain shareholders to block the company from taking specified action without their consent. |
Dispute Resolution |
Procedures for resolving conflicts, which may include mediation or arbitration. |
Restrictive Covenants |
Provisions which prevent shareholders from engaging in competitive activities, from soliciting employees or suppliers or customers of the company. |
The content of this article is provided for information purposes only and does not constitute legal or other advice.