Shareholder Agreements: Why Every Business Needs One
Two business partners launch a company together. Things go well for a few years. Then one wants to bring in a new investor the other disagrees with. Or one wants to sell their shares to a competitor. Or one stops contributing but refuses to be bought out. Without a shareholder agreement, each of these situations can become an expensive, damaging dispute with no clear road map for resolution.
What a Shareholder Agreement Does
A shareholder agreement sits alongside your memorandum of incorporation and governs the relationship between shareholders. It deals with matters that the Companies Act and MOI either do not address or address inadequately for your specific business context — including decision-making thresholds, share transfer restrictions, dividend policy, dispute resolution mechanisms, and what happens when a shareholder wants to exit or dies.
Key Provisions Every Agreement Should Include
Well-drafted shareholder agreements address the following: pre-emptive rights (requiring a selling shareholder to offer shares to existing shareholders before selling to outsiders); tag-along and drag-along rights (protecting minority shareholders or enabling majority shareholders to complete a sale); deadlock resolution mechanisms; restraints of trade; and clearly defined processes for valuing shares when a shareholder exits. The right provisions depend on the nature and size of the business and the specific relationship between the shareholders.
When to Get One
The best time to conclude a shareholder agreement is before or at the time of incorporation. Once a business is established and relationships are established, negotiating the agreement becomes more complicated — parties have more to argue about, and entrenched positions make agreement harder. Getting it right at the start is far less expensive and disruptive than dealing with a shareholder dispute later.
Contact Seokane Inc. to discuss a shareholder agreement tailored to your business structure and objectives.
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