Shareholder agreements – the often unknown effects

As my father once told me as I was growing up, “strong fences make good neighbours.” Even if you lived in the house next door to your brother or sister, you would probably want a fence between you to mark the boundary. And in a company context, a shareholder agreement performs much of the same function.

Many boardroom disputes arise from one party or another believing that they are putting more time and effort into the business.

A clear written understanding of what is expected from each director/shareholder, together with an ADR resolution framework, can help to resolve these problems – in other words, a “shareholders agreement”.

Here are just some of the things worth including in your shareholder agreement:

  1. Regulating investment
    Quite often one person puts in more money than another. Failure to agree expectations regarding investment can be fatal to a company’s long-term future.
  2. Pre-emption rights
    A shareholder agreement can provide that shareholders have to offer their shares to each other first and prevent people ending up working with somebody they do not know.
  3. Exit
    Shareholders agreement can clarify the vision everyone has for the company and build a consensus, but also provide for an exit procedure which does not involve litigation lawyers 🙁
  4. Deadlock
    If a majority doesn’t exist – e.g. a company run by two people on a 50-50 basis – then deadlock provision in a shareholder agreement can prevent catastrophe.
  5. Deadlock provisions
    Texas Shootout and Russian Roulette, which we’ll look at next week.
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