Founding Agreements between Shareholders

Our team of experts is highly experienced in formulating custom-made shareholders’ agreements to meet the needs of everyone involved. We can provide pragmatic advice to ensure every such agreement corresponds with your goals and expectations, keeping your best interests in mind.

Find out more information on how our shareholders’ agreements lawyers can help you by contacting us today. All you have to do is call us on this number or complete our online form and one of us will contact you to discuss the matter.

Why are shareholders’ agreements needed?

When establishing a company with family, friends or other professionals you have known for some time, it’s very easy to assume nothing can go wrong. You trust each other, and so you assume there’s no need to consider precautions in case things go wrong. 

Although we hope nothing goes wrong, sometimes we find that even friends, family, and business partners have conflicting interests. This may lead to conflict and financial loss. If there is no regulation and the required precautions are lacking, the parties may be forced to spend money on expensive litigation.

The company’s incorporation documents such as its Articles of Association may help to some extent, but will most likely fail to offer full protection for the shareholders. A well-formulated and comprehensive shareholders’ agreement can regulate your relationship, protect you, and give you confidence in any possible scenario. 

We hope that even if you have a shareholders’ agreement you won’t have to rely on it, but it’s better than regretting after the fact that you don’t have one. It’s a lot easier to agree on the terms of a shareholders’ agreement before the business starts generating profit. Protect your business and your investment.

What is a shareholders’ agreement?

It is an agreement between all, or part, of the company shareholders. The agreement is meant to protect the investments of shareholders in the company, to determine the work relations among them, and to decide the company’s management practice.

Such agreement will usually include:

  • Setting rights and duties of shareholders; 
  • Regulating the sale of company shares;
  • Describing the company management practice;
  • Protecting the minority shareholders and the company;
  • Defining the manner of material decision-making;
  • Setting rules to regulate the relationship among shareholders. 

How can a shareholders’ agreement help the minority shareholders?

If you hold less than 50% of the company shares you are a minority shareholder and will usually have very little, if any, effect on the company management. 

In order to avoid the need to rely on statutory protection (through courts), if you are a minority shareholder, the shareholders’ agreement can be formulated in such a manner that certain decisions require unanimous consent. Such decisions may be issuance of new shares, appointment or removal or directors, accepting new credit or changing the company’s main business.

How can a shareholders’ agreement help the majority shareholders?

As a majority shareholder (holding more than 50% of the shares) you may want to sell your shares without the minority shareholders’ consent. In this case, you can include a provision in the shareholders’ agreement forcing the minority shareholders to sell their shares. This will help you, as majority shareholder, to liquidate your investment at the right time and price for you. The suggested price for the shares must be fair for all shareholders, minority shareholders included.

Additional matters that you should consider in the agreement:

Limiting (or allowing) the option to establish a competing business to the company, or transfer business information of the company.

Limitations on transfer of shares may be prescribed in the agreement – for example, banning the option to sell to a competitor or to any other party not involved in management or having any interest in the business.

When is the right time to execute a shareholders’ agreement?

We recommend you do so as soon as possible. The best time to engage in a shareholders’ agreement is when the new company is being founded, as a founders’ agreement, before the issuance of the first shares. This is a good time to discuss the best way to manage the business and the expectations of shareholders on the investments they contribute to the business. 

The founders’ agreement is an indication of the shareholders’ ability to communicate and collaborate with each other. If the process is smooth, we can hope for a bright commercial future. If the process is difficult and unpleasant, it’s a sign of the future, necessitating additional consideration. If you move on to establish the business without a shareholders’ agreement, it is likely that the more established the business, the harder it would be to reach consent. 

What should the agreement include?

The main areas to consider include:

  • Appointment, removal, remuneration for directors; 
  • Financing arrangements; 
  • Communication of directors with shareholders on the business performance;
  • Dividend distribution; 
  • Shares allotment and transfer; 
  • Evaluation; 
  • Protecting special interests;
  • Retirement;
  • Efficient dispute resolution mechanism.

 

The conditions of the shareholders’ agreement will usually overlap the documents of incorporation. The documents of incorporation will normally include provisions on decision-making, holding meetings and transfer of shares. 

To ensure that your interests are safe and secure in the documents of incorporation and shareholders’ agreement, don’t hesitate to call us for advice.

Our view

We are known to be professional, meticulous and determined, to help make sure everything in your agreement is right for your causes. We’ll make sure the agreement is correctly adjusted for good management of the important relationships among all shareholders and investors, and their relationships with the company itself.

Why legal advice is important

The details of the shareholders’ agreement are highly important to everyone involved. Such agreements are legally binding and regulate the relationship among shareholders. For this reason it’s highly recommended not only that the shareholders enter such an agreement, but that they do so with the help of an expert legal team that can advise on best practices.

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