Shareholder's Agreement

Even if your company is not planning to raise capital immediately, it is important that a shareholders agreement be implemented as soon as it appears that there may be more than one shareholder. A robust shareholders agreement will:

• provide a framework for the transparent ownership and management of your startup. It will help to clarify how you intend to run the company and what you need to be mindful of in order to fulfill your obligations as a shareholder;
• signal to prospective investors that your company is well managed and provide transparency over the company’s ownership and management. This will help to reduce the likelihood that investors will require you to replace or negotiate the terms of your agreement with more investor friendly terms; and
• outline how potential disputes between shareholders can be settled. While disputes might seem unlikely early on, it’s helpful to agree on the resolution process from the outset so that at the very least there is an agreed framework in place that can kick in if (and when) issues do arise.

Because shareholders decide the content of the shareholders agreement, they can include a clause that outlines how the agreement can be amended in the future. Typically, such a clause would only allow for the agreement to be amended if all shareholders consent to that amendment.

A shareholders agreement enables an aggrieved shareholder to bring a cause of action against another shareholder that materially breaches one of their obligations under the agreement. Material breaches will usually occur in the event of a failure by a shareholder to provide capital where required under law or the agreement, a failure to comply with any particular provision of the agreement or where a shareholder commits fraud. Of course, the nature of your business will determine whether it is important to customise your shareholders agreement to define any other event as a material breach (eg a breach of an employment agreement by an employee shareholder). It is important that you clearly define and list all circumstances you wish to consider material breaches. If a material breach is not remedied, the shareholder at fault may be required to transfer his or her shares, pay compensation to other shareholders or may have their voting rights suspended.

The shareholders agreement should be signed or executed by the company and each shareholder. Remember the legal requirements for a company and an individual to sign documents is different, so make sure that you review the execution blocks correctly and sign the right one.

A shareholder can participate, either directly or indirectly, in the management of the company by appointing directors to the board. A shareholder’s right to appoint directors is provided for in the shareholders agreement. The shareholders agreement also sets out how the board operates, including when and how the board will meet and who must be present when it does.