Shareholders agreements are negotiated while everyone gets on and matter only when they do not, which is why they are so often deferred and so often regretted.
What it is for
Company articles govern the basic constitution. A shareholders agreement is a private contract between shareholders covering matters the articles do not.
Which allows arrangements that are confidential and tailored, and which binds only the parties to it.
Where the two conflict, the resolution depends on the drafting, which is one reason both should be prepared together.
Decision-making
Which decisions require what level of approval.
Ordinary operational decisions left to directors, significant matters requiring shareholder approval, and fundamental matters requiring unanimity or a high threshold.
Reserved matters typically include issuing shares, borrowing above a limit, selling the business, changing the business, and paying dividends.
Which gives minority shareholders protection against decisions that would harm them, and it can also produce deadlock.
Deadlock
Particularly acute in a two-person company with equal shares.
Mechanisms include a casting vote, referral to an independent expert, mediation, and various forced-sale procedures.
One well-known approach allows either party to name a price at which they will either buy or sell, with the other choosing which side to take, which produces a fair price by making the proposer indifferent.
Which is elegant and favours the party with more available cash, so it is not neutral in practice.
Transfer of shares
Restrictions on selling to outsiders, generally requiring shares to be offered to existing shareholders first.
Which prevents a shareholder introducing a stranger or a competitor into the company.
Valuation mechanisms for such transfers must be specified, since agreeing a price at the point of dispute is unlikely.
Leaver provisions
What happens to shares when someone leaves.
Good leaver and bad leaver definitions determine whether departing shareholders keep shares, sell at fair value, or sell at a nominal amount.
Which are among the most heavily negotiated terms and are the ones most likely to produce litigation if drafted loosely.
Defining the categories precisely, and defining valuation, is where the effort should go.
Founder commitments
Vesting, exclusivity of effort, and non-compete obligations.
Which are reasonable protections for the company and the other founders, and their enforceability varies considerably by jurisdiction.
Restrictive covenants that are too broad are frequently unenforceable entirely, which means overreaching produces no protection at all.
Intellectual property
Ensuring that anything created belongs to the company rather than to individuals.
Which is critical and is regularly missed, particularly where work was done before incorporation or by contractors.
Assignments should be explicit and in writing, since default rules vary and frequently do not produce the assumed result for contractors.
Dividends and returns
Policy on distribution, which matters where shareholders have different needs — some wanting income, others wanting reinvestment.
Stating the policy avoids a recurring argument, and it can be structured to allow flexibility while setting expectations.
The practical point
This requires a solicitor who does this regularly, and the cost is trivial relative to the cost of a dispute without one.
Template documents exist and are a reasonable starting point for discussion rather than a substitute for advice.
Nothing here is legal advice, and the applicable law varies considerably by jurisdiction.
Employee share schemes
Worth planning for early, since retrofitting them into an existing structure is harder.
Option schemes with tax advantages exist in many jurisdictions, subject to qualifying conditions on the company and the individuals.
Which means the structure must be set up correctly at the outset to qualify, and companies discovering this later have found the advantageous treatment unavailable.
Valuation for scheme purposes generally requires agreement with the tax authority, which takes time and should be anticipated.
Dispute resolution
Specifying how disagreements are resolved before they arise.
Mediation before litigation, arbitration clauses, and expert determination for valuation disputes all reduce cost and time compared with court.
Which is worth agreeing while relations are good, since agreeing a process during a dispute is generally impossible.
Review
Agreements written at incorporation frequently do not reflect the company several years later.
Which means reviewing at each funding round or significant change is worthwhile, and it is easier than discovering an obsolete provision at a critical moment.
Death and incapacity
Provisions determining what happens to shares when a shareholder dies or becomes unable to act.
Which prevents shares passing to family members who have no involvement in the business and no wish to be involved.
Cross-option arrangements, frequently funded by life insurance, allow surviving shareholders to buy the shares at a defined value.
Which protects everyone, including the deceased shareholder's family, who receive value rather than an unsaleable minority stake.
Funding obligations
Whether shareholders are obliged to contribute further capital, and what happens if one cannot.
Which is where dilution provisions and penalty mechanisms operate, and agreeing them in advance avoids a crisis negotiation.