Shareholders Agreements – Why They Matter
Shareholders Agreements – Why They Matter
After a company is formed and more than one shareholder owns or shall own an interest in a company, founders should strongly consider entering into a shareholders’ agreement. A shareholders’ agreement is an agreement that, among other things, governs the relationships between various stakeholders, including between shareholders and between shareholders and the company, and outlines corporate governance and decision-making processes. A shareholders’ agreement can be an invaluable tool to set the expectations of the various parties, protect the interests of shareholders and provide assurances to potential investors with respect to good corporate governance and their rights and protections as future shareholders of a company. This guide outlines some of the key benefits of entering into a shareholders’ agreement:
- Management and Governance
A shareholders’ agreements can address the management of the business and affairs of a company, including: (i) setting the size of a board of directors and procedures for how directors are elected; (ii) board and shareholder meeting-related procedures, including quorum and frequency of meetings, and (iii) outlining the powers and duties of a board of directors and any restrictions on matters that may also require the approval of any key shareholders. Setting up a foundation for clearly defined management and corporate governance may promote investor confidence in early-stage companies.
- Ownership, Transfer and Sale of Shares
A shareholders’ agreement can be a tool for closely-held companies to maintain a stable ownership-base by setting restrictions on the issuance, transfer and sale of shares. A shareholders’ agreement can outline various processes for how shares can be issued, transferred and sold in order to, among other things, prevent unwanted dilution, ensure that investments by outsiders are approved by existing shareholders and allow the company and/or existing shareholders to have the first right to purchase shares from a selling shareholder. Transfer restrictions can also promote transparency and equity among shareholders by requiring third party offerors to make an offer to all shareholders before proceeding with a purchase and sale of shares. Common provisions include: pre-emptive rights, rights of first refusal, drag-along rights, co-sale rights, and shotgun provisions.
- Decision-Making Processes and Disputes
A shareholders’ agreement can promote transparency and fairness by providing well-defined processes for how important decisions can be made with respect to a company. This can be accomplished by specifying voting thresholds for different types of decisions and including provisions that protect minority shareholder rights, privileges and interests when it comes to major decisions they may not otherwise get a say in. A shareholders’ agreement can also promote administrative efficiency by including mechanisms to avoid shareholder deadlock. A shareholders’ agreement can also address how future disputes will be handled, including arbitration or mediation, in an effort to avoid costly and long-standing legal disputes that can take years to resolve and have a negative impact on operations.
Conclusion
As described by the key benefits above, a well drafted shareholders’ agreement can demonstrate to potential investors an early-stage company’s commitment to well-defined governance, protection of shareholder rights and interests, and sustainable growth of the business. As a company grows, a shareholders’ agreement can be amended and updated to adapt to a company’s operational, management and ownership changes. If you have any questions about adopting a new shareholders’ agreement or amending an existing shareholders’ agreement, our team at LaBarge Weinstein LLP is here to assist you. Feel free to contact us at info@lwlaw.com.
The foregoing is not legal advice. This article is intended as high level information that might be helpful to start-up founders and others considering entering into a shareholders’ agreement and is not exhaustive in terms of the topics discussed or other legal considerations you should consider if entering into a shareholders’ agreement. You are encouraged to seek legal advice specific to your circumstances, either with LaBarge Weinstein LLP or another qualified lawyer, before launching a new enterprise. Good luck!
