Getting the Basics Right in a Shareholders Agreement

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Getting the Basics Right in a Shareholders Agreement
Essential clauses of Shareholders' Agreement
Shareholder Agreement vary by purpose, each requiring specific content to meet Legal requirements.

01

Parties to the Agreement

The shareholders agreement opens by identifying every shareholder, individuals, trusts, or corporate entities, along with the company itself as a party. Full legal names, addresses, shareholding percentages, and class of shares (ordinary, preference, or deferred) are listed in a schedule, establishing who holds what rights from the outset.

02

Recitals and Company Objectives

A brief recital section states the company’s incorporation details, registered office, and core business purpose. It confirms that the shareholders enter the agreement to regulate their relationship, protect minority interests, and align on long-term goals such as growth, dividend policy, or eventual exit.

03

Share Capital and Funding

The authorized and issued share capital is detailed, including par value, rights attached to each class (voting, dividend, liquidation preference), and any reserved matters requiring shareholder approval before new shares are issued. Further funding obligations, whether pro-rata or through convertible loans, are spelled out to prevent dilution without consent.

04

Transfer of Shares

A robust share transfer clause governs how shares change hands. Pre-emption rights grant existing shareholders first refusal on any proposed sale at the same price and terms. Tag-along rights allow minority holders to join a majority sale, while drag-along rights compel minorities to sell if a supermajority approves a full buyout, ensuring clean exits.

05

Lock-in and Vesting

Founders or key employees often face a lock-in period (1–3 years) during which they cannot sell. Vesting schedules for promoter shares, released monthly or upon milestones, protect the company if a founder leaves early, with unvested shares repurchased at nominal value.

06

Board Composition and Reserved Matters

The agreement fixes the board size, nomination rights (e.g., one director per 10% holder), and quorum rules. A list of reserved matters, altering articles, issuing shares, borrowing above a threshold, or changing business nature requires supermajority (75%) or unanimous shareholder approval, balancing control with protection.

07

Dividend Policy

Shareholders agree on a target dividend payout ratio or reinvestment strategy, often tied to profitability milestones. Preference shareholders secure fixed cumulative dividends before ordinary shareholders receive anything, creating clarity on cash flow expectations.

08

Management and Deadlock Resolution

Day-to-day management rests with the board, but deadlock at board or shareholder level triggers escalation: first mediation, then a Russian roulette or Texas shootout clause where one party offers to buy the other at a set price, and the recipient must either sell or buy at that price, forcing fair valuation.

Common Questions on Shareholder Agreement
Shareholder Agreement vary by purpose, each requiring specific content to meet legal requirements.
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