Should you have a shareholders’ agreement?
Sometimes these documents are called “Founders Agreements” that the founders execute at the outset of their endeavor.
There is no legal requirement that the owners of a company have a shareholders agreement – and, likely, at the founding of the company, there are not enough resources to devote to negotiating a shareholders’ agreement.
Yet, at some point such an agreement is prudent to make for more efficient and predictable decision making or required by investors.
A well-considered shareholders’ agreement can establish a framework for the governing of the company, the transfer of the company’s shares of stock, and protections against minority or majority overreach.
When considering a shareholders’ agreement, the following issues should be discussed:
Is the company itself a party to the agreement?
- Yes, if there are obligations placed upon the company.
Restrictions on transfers:
- Will there be a general prohibition on the transfer of shares?
Right of First Refusal:
- Will the other shareholders be given the right to purchase an owner’s shares before they are purchased by a third party?
- Will the founders have the right to purchase each other’s shares before they are offered to the other investors or a third party?
- Will certain transfers be permissible (family)?
- Will transfers only be allowed “pursuant to a bona fide written offer”?
Right to repurchase:
- Will the company be given the right to purchase shares on the event of an owner’s death, on the owner’s termination of employment, or on a division of family property because of marital disturbance?
- How will the purchase price be determined?
- How will the purchase price be paid?
Will the agreement govern certain shareholders decisions?
- Are particular items identified for shareholder approval?
- Do certain items require a supermajority shareholder vote?
- Do shareholders have the right to vote in individual classes?
Will the shareholders agree to matters related to the board of directors?
- Will certain individuals be elected to the board of directors?
- Will certain groups of shareholders be allocated seats on the board of directors?
- How are directors removed?
- How are vacancies filled?
- Do certain actions require certain votes (or the votes in the affirmative of particular members of the board of directors)?
Will the Company grant to the owners certain observation rights to board of directors meetings?
Will the Company and the Shareholders agree to a pre-determined schedule of board meetings, the manner in which a meeting is called, and other matters?
Will the owners have pre-emptive rights to purchase new shares if they are issued by the company?
- Does every shareholder (including founders) have the right?
- Is there a certain minimum level of ownership before the right exists?
- Do certain issuances not trigger the right (stock options, for example)?
Sale Transaction Dynamics:
- Co-Sale/Participation Rights/Tag Along Rights– can the minority owners require their shares be purchased as well?
- Drag Along Rights – can the majority owners require the minority owners to sell their shares?
Will a confidentiality provision be included in the agreement?
Will a non-compete, non-solicitation, or non-circumvention provision be included in the agreement?
When does the shareholders’ agreement terminate?
There may be many more issues to consider, depending upon the complexity of the shareholders’ arrangement. A well-drafted shareholders’ agreement can enable the owners to avoid the disruption of personal circumstances, protect the minority and the majority owners from each other, and set forth a number of pre-determined processes to handle the occurrence of certain situations. Shareholders may find the existence of a shareholders’ agreement provides for more efficient operations and a more predictable operation.