Shareholder agreements: a simple guide
Updated: 8 December 2019
This article addresses common shareholder agreement questions.
In a hurry? Jump ahead.
What is a shareholder agreement ?
Simply, a shareholder agreement sets out the rights and responsibilities of shareholders.
Importantly, a shareholder agreement is not the same as a share sale agreement.
A share sale agreement outlines the terms of a share sale such as how much an investor will pay for shares, the share class and when legal ownership will pass to the buyer, this agreement does not always go into detail about shareholder rights.
What's in a shareholder agreement ?
So what's in a shareholder agreement ?
Below is a summary of the usual items in a shareholder agreement.
1. Share class rights
Each shareholder can be given a different class of shares.
And each class of shares can have different rights attached like the ones in the example below.
Example Share Class
Example Share Class Rights
2. Business and management
The business and management clause covers scope of business, director appointments and removals, director pay, voting, chair and shareholder reserved matters.
3. Budgets and finances
Accounting principles, annual budgets and plans, audits, shareholder remedies, financing of the business and access to financial information fall under budgets and finances.
4. Share transfers and registration
Share transfers, compulsory transfers and how new shareholders can join are typically under a share transfers and registration section.
5. Tag along and drag along rights
Tag along rights benefit minority shareholders. This means minority shareholders can join a sale. For example, if a majority shareholder is selling their stake.
Drag along rights mean that a if a majority shareholder sells their stake, the prospective owner can force the minority shareholders to join the sale.
Both rights are usually included in a shareholder agreement.
6. Material breach
A material breach clause states what happens if there is a breach of the shareholder agreement. Usually, shareholders are given a notice period to fix any breach.
Voting rights can be suspended, a forced transfer of shares and compensation may be payable to the other shareholders impacted by the breach.
7. Dispute resolution
A dispute resolution clause helps you avoid the time and cost of formal legal proceedings.
8. Confidential information
Each shareholder will access confidential information of your startup, a confidentiality clause clarifies how that information will be kept secure.
9. Intellectual property
Intellectual property includes copyright, inventions, confidential information, designs, trade marks and other creations.
A clause about intellectual property exists to protect your startup.
10. Deed of accession
Adding a deed of accession to your shareholder agreement will be cost effective in the long run.
So what is a deed of accession ? It's a deed that says any new shareholder agrees to the terms of the shareholder agreement. So this means, usually the shareholder agreement does not have to be revised to include the new shareholder.
Got questions or comments about shareholder agreements? Be sure to leave them below.
I wish you success in your ventures!