Components of a Shareholders Agreement: Five Shareholders Agreement Clauses You Must Include
Every successful shareholder’s agreement secures the interests of both the business owners and shareholders. However, disputes over business decisions, death, injury, disability, etc., are inevitable. Such issues, if not handled at the onset, can create conflict. Thus, it would be best to have a comprehensive shareholder’s agreement, with clearly defined shareholders agreement clauses, to clarify how to handle and solve these cases.
What Is a Shareholders Agreement?
As defined by prestigious providers of Hong Kong Incorporation Services, a shareholder agreement is a contract for a company’s shareholders. It specifies how they should support the business. Defines the shareholders’ duties and responsibilities and provides details on company management and its benefits and interests.
What are the key points to include in your shareholders’ agreement? To help you with that, below are the five important shareholders agreement clauses you must look into.
1. The Share Vesting Clause
Vested shares are part of the incentive for shareholders, especially for start-ups. Vesting shares ensures that the founders may not own shareholdings until they fulfil the set conditions. This share helps the enterprise in several ways, such as increasing retention and deferring prepayment.
The share vesting clause refers to the parameters and specifics of how a share vesting is done. Vesting Terms usually involve staying in the organization for a set amount of time or meeting specific business goals and objectives.
2. The Pre-emptive Rights and Right of First Refusal Clause
Second, are the pre-emptive rights and the right of first refusal clause. These shareholders’ agreement clauses aim to safeguard current shareholders against the unintentional dilution of their company shares.
Existing shareholders are granted any pre-emptive right (further distribution of shares) or right of first refusal (outgoing share ownership) first before any third party. Without any of these clauses, existing shareholders might have a smaller slice of a bigger pie.
3. The Special Rights to Appoint Directors and Supermajority Clause
These next shareholders agreement clauses aim to secure the interests of minority shareholders. In principle, minority shareholders can’t stop adopting regular resolutions, like the appointment and dismissal of board members.
That means a minority shareholder may have 49% of the company’s stake but will have no authority to control the board of directors’ composition. The shareholders’ agreement should include a clause allowing a minority shareholder to choose or replace a director to ease such inflexibility. This clause keeps the voices of minority owners from becoming buried and allows them strong negotiating power in the organization.
4. Non-competition Clause
In shareholders’ agreements, non-competition clauses are usually common. It removes any uncertainty that may exist due to the lack of clear restrictions. The non-competition clause clarifies how shareholders may participate in rival transactions during or after their stay as shareholders.
The agreement should specify the terms and conditions plain and simple, including the extent and length of all the constraints. The shareholders’ agreement must contain a non-competition clause to protect the company if a shareholder gets hold of the backdoor and shares confidential information.
5. Deadlock Resolution Clause
Finally, business owners should never forget the deadlock resolution clause. In essence, a company experiences a deadlock when shareholders of equal footing aren’t willing to retract from their beliefs or position. A deadlock also happens when a super-majority or nonbinding approval is sought but can’t be achieved.
Thus, if the shareholders wouldn’t agree to go on at once, this will bring an otherwise fairly successful company into a snail’s pace. With that, the shareholders’ agreement must describe, long in advance, what causes a deadlock. For instance, the inability to enact a proposal after multiple attempts and the viable alternative for such an incident.
Drafting a Shareholders Agreement isn’t an easy task. It’s a legal document that might dictate the success or failure of your business. It would be best to invest in professionals that provide reliable and effective solutions.
Contact 3E Accounting Hong Kong today to help you prepare a shareholder agreement. Rest assured that your shareholders’ agreement contains the required essential shareholders agreement clauses to meet your company’s goals and expectations. After all, securing your company’s survival depends on setting up a shareholders contract that lives up to its name.