If, like in many startups, you are a group of individuals that have come together to start a business, and are about to incorporate and become shareholders in your company, you should have a shareholders agreement in place.
This guide will give you an idea of what a shareholders agreement is, why it’s a good idea to have one in place from the outset, and how to navigate the template Shareholders Agreement available on Cooley GO Docs.
What is a shareholders agreement?
It will come as no surprise that this is an agreement between the shareholders of a company. Essentially the agreement governs the shareholder to shareholder relationship and the shareholder to company relationship.
The aim of the shareholders agreement is to provide clarity on certain key matters that affect shareholders such as what rights they have as shareholder, when they need to be consulted by the directors on decisions affecting the company, and under what circumstances can they transfer their shares to a different person. A well drafted shareholders agreement should complement your company’s articles of association (see our Guide to Articles of Association for more information).
Is there a legal requirement that states we must have a shareholder agreement?
No, there is no legal requirement to have a formal shareholders’ agreement.
If there is no legal obligation, why should we have a shareholders’ agreement?
A shareholders agreement is beneficial for both the shareholders investing in your company, and the directors running your company.
From the shareholders’ perspective, the agreement provides a ‘go to’ manual for situations where they need to assess what rights they have as a shareholder, or assess under what circumstances they can transfer their shares to a third party. The agreement also provides the shareholders with the opportunity to voice their expectations of the company e.g. by requesting a dividend policy be put in place, and can provide beneficial protections for minority shareholders (those holding less than 50% of the shares) (see below).
From the company’s perspective, the shareholders agreement provides a solid, unifying framework that prescribes how the company directors should operate in given situations e.g. who they need to consult if they would like to allot shares to new investors or grant options to key employees. This can ensure stability for the company should any disagreements or conflicts arise in the future.
Can we not put this off until later?
While you can of course draft the shareholder agreement at a later date, it is sensible to have this drafted and agreed at the start to avoid any complications further down the line should the shareholders change their attitudes towards the running of the company or expectations from the company.
Even if the agreement will need to be upgraded as and when you take on external investors, investors will be pleased to see that the current position is clearly documented.
How can a shareholders’ agreement benefit minority shareholders?
Many decisions taken by the company require the agreement of shareholders holding at least 51% of the company shares. In a private limited company, the likelihood is that you will have only a few shareholders and therefore the balance of power may lie with one or two individuals. The shareholders agreement can shift that balance of power by incorporating certain ‘veto’ rights for minority shareholders so that they have more of a say in the key decisions being made.
What does the template shareholders agreement cover?
The template agreement is designed as a very basic shareholders agreement for companies that have more than two shareholders. The template covers the following key areas, which are areas that are most commonly covered by shareholders agreements:
- shareholder involvement in company decision making, including the appointment and removal of directors;
- the dividend policy of the company;
- the circumstances under which a shareholder may transfer their shares to a third party and restrictions on who they can transfer them to;
- the circumstances under which the company can issue further shares to new investors;
- the restrictions that apply to the founders of the company if they decide to leave; and
- the power to appoint a director to the company for significant shareholders.
What does the template shareholders agreement not cover?
The template agreement is designed for start-ups and therefore does not include some of the more complex provisions that you would see in later stage growth companies that are accepting venture capital investments or other forms of investor participation. For example, the agreement does not include provisions relating to ‘anti- dilution’ rights, aimed at protecting shareholders from having their shareholding diluted by later rounds of investment, and ‘tag along and drag along’ rights relating to the sale of shares by majority investors. You may also have other specific matters (such as IP ownership) that would sensibly be covered in the shareholders agreement.
Of course you can add these and other provisions to the template agreement, but it may be worthwhile having a chat with one of our experts to determine whether these are necessary for your business and how they operate in practice.