Provisions in Shareholders Agreements: Why They Matter
A shareholders agreement is a legal document that outlines the rights and responsibilities of shareholders in a company. It is essentially a contract between the shareholders that governs how the company is managed and how ownership is divided. A well-drafted shareholders agreement can help prevent disputes between shareholders, provide clarity on decision-making processes, and protect the rights of minority shareholders.
One important aspect of a shareholders agreement is its provisions. These are specific clauses that define the terms and conditions of the agreement. In this article, we’ll explore some of the key provisions that should be included in a shareholders agreement.
1. Ownership & Share Transfer
One of the most fundamental provisions in a shareholders agreement is the ownership provision. This clause sets out the percentage of shares held by each shareholder and how those shares can be transferred or sold. It is important to specify the conditions under which a shareholder can sell their shares, such as offering them first to existing shareholders before selling to a third party.
2. Decision Making
Another key provision is the decision-making clause. This outlines how decisions will be made within the company, whether through a board of directors or unanimous shareholder consent. It is important to specify what types of decisions require approval from the shareholders, as well as the quorum necessary for a meeting to take place.
The dividends provision outlines how profits will be distributed to shareholders. This can include the frequency of dividends, the amounts to be paid out, and the priority of payments (i.e. whether preferred shareholders receive dividends before common shareholders).
4. Deadlock Resolution
In the event of a disagreement between shareholders that prevents decision-making, a deadlock resolution provision can be added to the shareholders agreement. This outlines a process for resolving disputes, such as mediation or arbitration.
5. Non-Compete & Confidentiality
It is common for shareholders agreements to include provisions that prevent shareholders from competing with the company or disclosing confidential information. This protects the company’s intellectual property and trade secrets, as well as its competitive advantage.
6. Exit Strategy
Finally, an important provision to consider is an exit strategy. This outlines how shareholders can exit the company, whether through a buyout, sale of shares, or other means. It is important to specify the terms of the exit, such as how the value of the shares will be determined and whether there are any restrictions on who can purchase the shares.
In conclusion, provisions in shareholders agreements play a critical role in defining the terms and conditions of the agreement. They provide clarity on ownership, decision-making, dividends, dispute resolution, and exit strategies. By including these provisions in a well-drafted shareholders agreement, companies can protect themselves and their shareholders from potential disputes and legal issues.