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Shareholders' agreement: new company

This shareholders agreement for a new company comprehensively covers the issues that matter for founders of start-ups. As your company grows, this shareholders agreement should help protect your the value of your investment (whether financial or time) and help ensure that the line as to who makes decisions on strategic issues remains clear. It is suitable for most new companies: regardless of the number of shareholders there are, or the participation of each in the daily operation of the company. A sample of the document is available for view.

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About this shareholders' agreement

A shareholders’ agreement is an essential document for any new company or start-up. Not only should this template help you establish the strategic management structure you need to grow your business, but also ensure that your investment is protected when you or other owners decide to sell.

This template is suitable for companies in any industry and with any number of shareholders. It could be put in place by a majority or a minority shareholder.

All start-ups require an investment of time and expertise, and not just finance. This shareholders' agreement template can be used if some owners are also directors or managers contributing time, experience or other value, not just funding.

The benefits of using this shareholders' agreement

Clarify decision making

Under company law, directors are employees, accountable to the company and its shareholders. Where directors are also shareholders, as is so often the case for new companies, a director may be able to make decisions that benefit himself as a shareholder, but that aren't in the interests of his fellow shareholders.

This agreement allows you to set the limits of director power, and clarify on what matters directors should defer decision making to the shareholders. Doing so helps ensure that shareholders are kept informed of important matters, and that the most important decisions are made by them as a group, and not by an individual.

The agreement also gives shareholder-directors a framework of freedom on what decisions they may take without requiring a shareholder meeting, allowing confident, decisive action when it is needed.

Rebalance shareholder power on issues that are important to you

Voting power, by default is in proportion to shares held. Your shareholders' agreement can over-ride this basis, allowing you to specify the rules as to how decisions on important subjects to you are made. Minority shareholders can be given more say on certain issues.

For example, you might give every shareholder an equal vote on decisions relating to appointment of directors regardless of proportionate ownership. Or you might decide that a unanimous vote is required to agree the sale of the company to a third party. Decisions on different subjects could be decided in different ways depending on the important of those subjects to each shareholder.

You can go as far as to completely separate ownership and control: useful if some shareholders may not have experience or knowledge of the company to allow them to make effective decisions. For family businesses and companies where some shareholders hold shares only as an investment, this is likely to be a useful feature.

Protect the value of your investment

A shareholders agreement can help prevent the actions of other shareholders from reducing the value of your investment by their actions. It can do this by setting out:

  • requirements for disclosure and for approval for certain actions such as large asset purchases
  • how assets, time and expertise brought into the business should be valued on sale

Guard your privacy relating to how your company is managed

Some aspects of management can be set out in the company's articles of association. However, unlike the articles, your shareholders agreement is a private document that you don't have to file with Companies House or make publicly available. Only you and other shareholders will know the arrangements you have. How your company is managed remains confidential.

Reduce the likelihood and cost of disputes

Disputes between owners and other stakeholders are expensive and can be disruptive and detrimental to the on-going operation of the business. Written in plain English and covering the points most needed by start-ups, shareholders are less likely to dispute what was agreed when the document was signed. The inclusion of a dispute resolution procedure within this template makes resolving any that do occur easier.

Control in difficult situations

A shareholders agreement allows you to plan for the worst so as to keep the business going. Within it, you can set out what would happen should certain events occur, whether the sudden departure of a key founder or the withdrawal of a source of funding.

When to use this shareholders' agreement

You can put a shareholders' agreement in place at any time, but doing so shortly after incorporation is usually the best time.

Like our other documents, this template is in Microsoft Word format. For a legal agreement such as this one, which largely comprises commercial terms, the main advantage of a Word document is that you aren't restricted to choices that automated software or simple PDF templates might give you - you really can create an agreement that fits your business. Of course, as your business grows, you can also revisit the document and amend it as necessary. Features within Word such as Track Changes allow you to collaborate with other owners easily.

The law in this shareholders' agreement

The law in this document is both company law and commercial contract law. Our guidance notes make it clear which paragraphs you can safely edit or delete, and which we recommend leaving as drawn.

This document is written in plain English by a former English solicitor who specialises in commercial drafting and who has practical experience of resolving shareholder disputes. As a former director of numerous private and publicly listed companies, he includes practical, “real world” considerations. The agreement is comprehensive in the cover of legal and management issues.

Shareholders' agreement features and contents

No other shareholders’ agreements for sale on the Internet are so comprehensive in their cover of legal issues and the drafting explanations and tips supplied. In many areas, we give you complete alternative paragraphs and explain in the notes when each will be the most suitable for you. This document contains over twenty commercial paragraphs as well as legal provisions. You can choose which are suitable for your needs. Many are based on our practical experience as solicitors of dealing with shareholder disputes.

Examples of these provisions are:

  • obligations of the company to the shareholders (the company is also a party to the agreement);
  • how shareholders will maintain their rights if they are not present at meetings;
  • roles of directors and actions by the company or a director which require shareholders’ consent: controls and redistributes power between shareholders so that majority shareholders cannot force decisions;
  • new shareholder rights and restrictions: even if he is a trustee in bankruptcy;
  • how to deal with new intellectual property;
  • transfers of shares and rights of pre-emption: when allowed, under what conditions and to whom;
  • exit strategy: the hidden bomb if neglected;
  • key man insurance;
  • publicity about the deal;
  • confidentiality;
  • use of a shareholders own assets in the business.

Shares valuation for departing shareholders

The document additionally includes provision for valuation of the shares of a departing shareholder by reference to a valuation based on your instructions to an accountant. The valuation depends on the parameters used, so your instructions are critical. We have provided a comprehensive version which you can edit according to the deal you wish to strike with a selling shareholder.

Other versions of this shareholders agreement

We also offer a version of this agreement for an established company and two further variations for companies where there has been a major debt investment or loan to the company, possibly by a minority shareholder.

For companies that have, or might shortly have a shareholder who is a professional investor, for example, a business angel, venture capital firm or private equity fund, we have a version of this agreement that includes drag-along and tag-along clauses, and right of first offer and right of first refusal provisions.

Draftsman

This document was written and is maintained by solicitors at Net Lawman to comply with current English law.

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