Set the Rules of the Game Before you Start: What to include in a Shareholders’​ Agreement

You’ve come up with an exciting business idea, you’ve formed a relationship with a business partner. You’re looking forward to launching your business.

Whilst all partners are on favourable terms, all is rosy, now is the time to set the rules of the game.

A shareholders’ agreement is used to outline the business practices, matters to consider in the event there are disagreements or unfortunate circumstances arise. It is the prenuptial before your wedding vows in the business world.

What do you include in a Shareholders’ Agreement?

Below are some matters to consider when drafting a shareholders’ agreement with your business partner(s):

1.     Those decisions which can be made by one individual partner

2.     The maximum dollar amount to be spent without consent from the other partner(s).

3.     Decisions which require a majority vote, or a greater than a certain percentage in favour vote.  75% vote for example

4.     The roles and responsibilities of each partner

5.     What happens if one partner wishes to exit the business. Consideration can also be given where ownership is not equal and one party has a controlling vote to ensure he best interest of all parties is taken in to account. This is known as Drag Alongs & Tag Alongs

6.     What happens if one partner dies or is no longer able to work in the business

7.     A dividend policy for payment of profits

8.     The nature of the business and process for changing the overall purpose of the business

9.     How directors will be appointed and removed

10.  Requirements for personal fund contributions, eg how much each party will contribute, in which circumstances additional funds can be called upon to inject in to the company. How the funds will be treated. Eg as a loan, equity, or a gift

11.  The process if there is a deadlock or dispute between the partners

Once you have this agreement in place you can focus on building your business, with comfort that there are mechanisms in place to manage unforeseen circumstances and that you have agreed upon the expected outcomes and profit share of the business.