What is important to include in a shareholders' agreement?

Alidad Vakili / January, 2018

Description

Alidad Vakili, Associate at K&L Gates explains important provisions to include in a shareholders’ agreement such as shareholders’ votes and rights of shares in case of divorce, disability or death.

Video transcript:

What is important to include in a shareholders’ agreement?

A shareholders’ agreement is another important agreement, not always used but oftentimes used with startups. Essentially, what it is it’s an agreement between the owners of the company, the shareholders, that govern how their ownership will be managed with regard to the company.

The sorts of things that it will cover would be who has what ownership percentage in the company and how decisions are made about very important issues. So, for example, if the company is going to get sold, if it’s going to be merged with another company, which shareholders or how many shareholders’ votes do you need to carry that decision.

So, it’s a way to sort of manage some of the important decisions in the company, also is important in managing what happens if there’s a break up in the company between the founders or if one of the founders wants to depart or wants to sell his or her stock in the company, how is that process managed. So, oftentimes you’ll see right to first refusal that’ll be included in the shareholders’ agreement to allow either the company to buy back stock that a particular founder wants to sell or particular shareholder wants to sell or for the other shareholders to buy that person’s stock. So, that you can keep it close to the family so to speak, rather than having the stock sold to someone who may not be as invested in the company’s success.

Other transfer restrictions may be included in initial shareholders’ agreement as well, you can also cover in a lot of times, you’ll see cover the sorts of events that might occur for shareholders that would impact the company. As an example, if a particular shareholder gets divorced, sometimes, depending on the divorce, settlement or agreement that the spouse of the shareholders may end up with the stock of the company, and that may or may not be a good thing, for the company.

Sometimes it will be a provision that will cover what happens in the event of a divorce. For example, if there is a divorce prior to the spouse of the shareholder getting stock, the company would have to buy that stock, again to keep it within the company in the existing shareholder’s hands, rather than having it go to another person.

A couple scenarios may be, if there is a disability that occurs for a particular shareholder who may be pretty pivotal for the company’s success, what happens and how we do transfer that person’s stock if they can’t be involved in the business or don’t have that influence that they might previously have had. Or if a person wants to resign and don’t want to be involved at all in the company or wants to go for a different route and work on a different venture.

There is a number of different scenarios that might come up, divorce, disability, death might be another one too. What happens if one of the shareholders passes away, does the stock go to that person’s estate or does it get bought back by the company or by the other shareholders? You’ll see oftentimes those sorts of provisions as well as a number of other provisions, but essentially, it’s all geared towards governing the relationship that the shareholders have vis-a-vis the company that they own.

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