A well-crafted shareholder agreement is essential for any company with multiple shareholders. It sets clear expectations, reduces conflicts and provides a framework for decision-making.
To protect your company’s rights and mitigate future disputes, there are certain key terms to include in your shareholder agreement.
Ownership and share transfer restrictions
It is important to be transparent about who owns what percentage of the company. There should also be a clear outline of the circumstances in which shareholders can transfer their shares. This can help prevent unwanted parties from gaining control and ensure that existing shareholders have the first right of refusal if another shareholder decides to sell.
Decision-making and voting rights
A shareholder agreement should clarify how leaders will make important decisions. It must specify what decisions require a vote, the type of majority needed for approval and which shareholders have voting rights. Including these details ensures that everyone knows their role in the decision-making process, reducing potential shareholder disputes.
Dividend distribution
The agreement should outline how and when the company will distribute dividends among shareholders. This term helps prevent disagreements by setting clear expectations about profit-sharing. The agreement should also state whether dividends are mandatory or discretionary and the conditions of payment.
Dispute resolution
Disagreements are inevitable, but a shareholder agreement should establish resolution measures. Including a dispute resolution clause can help the company avoid costly and time-consuming legal battles. For example, the agreement might outline a thorough guide for undergoing mediation or arbitration.
Exit strategies
Agreements should include terms that address what happens if a shareholder wants to exit the company. There should also be provisions that account for death or incapacitation. An exit strategy term ensures a smooth transition and protects the company from potential instability.
Non-compete and confidentiality clauses
To protect the company’s interests, the shareholder agreement should include non-compete and confidentiality clauses. These clauses prevent shareholders from engaging in activities that could harm the company, such as the disclosure of sensitive information to competitors.
Statistics indicate that 75% of venture-backed companies never return cash to investors. This illustrates a genuine cause for concern for business owners and investors alike. A thorough shareholder agreement provides structure that contributes to business success in a noticeable way.