How to draft an effective shareholders’ agreement?
We are often asked for assistance in drafting a shareholders’ agreement. A common question is: what should we agree on? It’s a difficult question for the drafter of the agreement to answer because the shareholders’ agreement should deal with matters that are important to the shareholders and the company whose shares are in question. Usually, the process turns out to be a discussion about what the parties should agree and how.
The law doesn’t require you to draw up a shareholders’ agreement, nor does it prescribe the content of such agreement. The Finnish Limited Liability Companies Act provides the framework for the decisions and actions of a limited company, but it doesn’t regulate, for example, the responsibilities of each shareholder or what happens to their shares if they fail to meet their obligations. The Articles of Association may contain some additional provisions to the Act and basic restrictions on the transfer of shares, but these provisions are more technical in nature.
The nature of the business and the way in which the partners contribute to the business will determine the content of a shareholders’ agreement. The purpose of the agreement is to establish common guidelines and principles for the ownership, management and governance of the company, as well as for its operation in the event of exceptional circumstances. Defining these principles requires a more detailed understanding of the parties’ objectives.
The starting point for drafting a shareholders’ agreement should be the shareholders’ shared vision of the company’s objectives and ownership goals. These can vary considerably, for example, between a company where the owners aim to develop the business with a view to an exit after a certain period, and a company where the aim is to build a business that will eventually be passed on to the next generation. Another important distinction is the level of shareholder involvement and commitment to the business. In an entrepreneurial technology startup, it is usually assumed that the shareholders are fully committed to working full-time in the company. In contrast, in a company operating in a capital-intensive industry, some shareholders may be actively involved in the company’s operations, while others may participate solely as financial investors.
In essence, the purpose of a shareholders’ agreement is the same as that of any other contract. It sets out the terms agreed by the parties and serves both as a preventive measure against future disputes and as a source for resolving them. For the parties involved, a shareholders’ agreement provides peace of mind and the certainty that potential exceptional situations have been anticipated in advance. However, shareholders’ agreements have their limitations. They are often drawn up at the start of a company or when there is a significant change, such as a change in the shareholder structure or the receipt of an equity investment. Over time, the parties’ intentions and objectives may evolve. It is therefore advisable to periodically review the shareholders’ agreement and assess its relevance and appropriateness.
In my experience, most disputes over shareholders’ agreements revolve around a few key issues. These include concerns about whether a shareholder’s contribution to the company is sufficient in the eyes of the other shareholders, a shareholder’s departure from the company and actions that breach the shareholders’ agreement. Particularly in entrepreneurial companies, shareholders tend to be very sensitive to ensuring that each member’s contribution to the business is proportionate to their ownership. This issue is particularly common in startups where, after the first few years, a founding team member may decide to leave the company because it has not developed as expected or because their role has evolved into one in which they no longer see a future. These so-called “leaver” situations are inherently delicate, as they often involve mutual disappointment and differing views on the value that the departing shareholder has contributed to the company. Such disagreements often lead to disputes over the transfer of shares. Breaches of the shareholders’ agreement may include violations of non-compete clauses or excessive external business engagements that reduce the shareholder’s ability to contribute to the company.
When considering a shareholders’ agreement, the issues that concern the parties most often relate to the shares of the company and their transfer. While these matters are at the heart of the agreement, they require a broader context in which to be applied. Standard vesting provisions relating to the vesting of shares are often easier to understand and discuss than issues relating to the personal commitment of shareholders, their contributions and the consequences of failing to do so. However, it is important to address these more complex issues with sufficient precision to ensure that all parties fully understand what they are agreeing to and are genuinely committed to the terms.
It is easy to find ready-made templates for shareholders’ agreements online. These templates provide a good starting point for understanding the key issues that should be addressed in a shareholders’ agreement. However, there is always a risk in relying on a template if the parties have not thought carefully about what they need to agree and what matters are important to them and their company. A pre-existing template can easily distort thinking in such a way that the document is simply amended rather than considered to cover everything that needs to be addressed in the specific case. Important provisions may be missing from the template, even if they are critical to the company’s circumstances.
A well-drafted shareholders’ agreement gives the parties peace of mind and facilitates commitment to the company by ensuring that the rules and principles are clear. A poorly drafted agreement, on the other hand, can lead to deadlock or, worse, bind shareholders to terms that are contrary to their intentions. Nevertheless, the agreement remains legally binding and resolving such a situation can be very challenging.
The parties themselves are the best experts in determining how they wish to agree on the matters set out in a shareholders’ agreement. The role of an external expert in this process is to provide insight, to present different options for resolving issues and to share experience from similar situations. However, the actual drafting of the agreement is best left to a skilled lawyer, as the agreement will be interpreted primarily based on its wording. Careful attention must therefore be paid to both the language and the content of the agreement to ensure that it accurately reflects the parties’ intentions.
It is also important to include the company itself as a party to the agreement. Even if the shareholders’ agreement covers matters relating to the company’s governance and business principles, it will not bind the company unless it is a party to the agreement. For the agreement to be binding on the company, it must also be duly approved by the company. The procedural rules agreed in a shareholders’ agreement, such as those relating to decision-making and the distribution of profits, often require approval at a general meeting by a qualified majority or unanimous vote of the shareholders. The same approval process applies to the company’s shareholders who are parties to the agreement.
Even a well-drafted agreement can lead to disputes. It is therefore important to determine how disputes will be resolved. Arbitration is becoming an increasingly common method of dispute resolution in shareholders’ agreements because of its speed and confidentiality. The nature of the issues addressed in these agreements often makes it undesirable for the parties to resolve disputes through public court proceedings. In addition, it is crucial for the company’s operations to reach a resolution as quickly as possible.
When it comes to drafting a shareholders’ agreement, the process can be started by addressing the following key issues:
- Define the shareholders’ shared vision for the business and its ownership (e.g. exit strategy within a specified timeframe).
- Determine the level of commitment and contribution expected from the shareholders (e.g. full-time or part-time work, involvement as an advisor or board member).
- Establish shareholder compensation policies (e.g., salaries, expense reimbursements, milestone-based payments, dividend payout policies).
- Defining personal obligations and restrictions for shareholders (e.g. non-compete clauses, secondary employment, intellectual property rights).
- Developing the company’s ownership structure (e.g. conditions for admitting new shareholders).
- Regulating transfer of shares scenarios (e.g. vesting periods, good/bad leaver provisions, share valuation methods in different exit scenarios, post-departure ownership rights).
- Establishing decision-making principles (e.g. consensus vs. majority voting, matters requiring unanimity or qualified majority).
- Establishing procedures for dealing with deadlocks (e.g. forced share sales, mandatory tender offers, appointment of an external mediator).
- Establishing dispute resolution mechanisms (e.g. arbitration clauses, jurisdiction agreements, appointment of a company representative for disputes).
If the drafting or updating of a shareholders’ agreement is relevant to your company, our lawyers will be happy to assist you in navigating these issues and preparing a new or revised agreement.
