Why Your Business Needs A Shareholders Agreement

In countries with a common law system, it is almost impossible to imagine a successful business without concluding a shareholders agreement, also known as corporate agreement. This document details all the rights and obligations of business partners aimed at protecting not only the entire company, but also the personal investments of every shareholder. Therefore, businessmen should not doubt for a second and draw up a shareholder agreement immediately.

Corporate Game Code

A corporate agreement is the “rules of the game”, binding on the participants of the corporation, which enable shareholders to adjust the management order at their discretion.

Unlike the charter, which is submitted to the state registrar and presented to counterparties, the corporate contract is a confidential document and is not subject to disclosure to third parties. There is also no need for the agreement notarization.

You can draw up a corporate agreement by providing for all shareholders. However, it is not uncommon for such an agreement to be drawn up between, for example, owners of a particular class of shares. The purpose of the corporate agreement is to protect shareholders' investments, and most importantly, to establish fair relations between them.

Shareholders agreement for minority shareholders

A shareholder who owns less than 50% of the shares cannot manage the company and make important decisions without the consent of the rest of the shareholders.

Corporate agreement grants the minority shareholder the right to vote in making important decisions affecting the business, such as issuing shares or changing the type of company’s activities.

In the interests of a minority shareholder, an agreement may also provide for a ‘tag along’ clause. It means that when selling a majority share, you have the right to demand the redemption of your share on the same conditions, and the buyer will be obliged to purchase all the shares offered to him. You can also exit the business if the majority shareholder leaves.

Shareholders agreement for majority shareholders

You will be able to deter minority shareholders from selling their shares to third parties (drag along right) or vice versa - require the minority shareholder to sell his minor share along with yours. But here it is important to consider that the price of the shares put up for sale is fair for all shareholders, without exception.

A successful business requires a healthy relationship between all shareholders. Therefore, in order to avoid the problem, it is important to develop a shareholder agreement and provide for the rules for the sale and transfer of shares - to whom shares can be transferred, on what terms and at what price.

Advantages for investors

You will be protected from unwanted risks and will clearly understand the conditions for joining the company.

In the case of the purchase of the entire business, you will be able to make a full purchase and will be spared from having a “minority shareholder,” whose rights will have to be taken into account.

The agreement may provide for guarantees that the business owner gives. If such guarantees are not confirmed in the future, the investor will have the right to demand damages or even get out of business.