Shareholders agreement

curl -X POST https://dealroom.todo.law/api/v1/agent/contracts \
  -H "Authorization: Bearer drk_YOUR_KEY" \
  -H "Content-Type: application/json" \
  -H "Idempotency-Key: $(uuidgen)" \
  -d '{
    "contractType": "SHAREHOLDERS",
    "governingLaw": "ENGLAND_WALES",
    "language": "en",
    "party": {
      "legalName": "Your company"
    },
    "counterparty": {
      "legalName": "The other company"
    },
    "terms": {
      "company-name": "<company-name>",
      "company-jurisdiction": "<company-jurisdiction>",
      "board-size": "12"
    },
    "inline": "md"
  }'

What it is and when it is used

A shareholders agreement is used when a private company has two shareholder groups of different weight: a majority shareholder that controls the company and a minority shareholder, often an investor or a co-founder with a smaller stake, that needs protection. It sits alongside the articles of association and regulates governance, share transfers, new issues, dividends, information, deadlock, exit and the relationship between the agreement and the articles.

The standard terms also cover the conduct of the business, shareholder meetings (an annual meeting within six months of year end, 14 days' notice and a 75% quorum) and confidentiality. The definitions do real work: fair market value is set by an independent valuer on a going-concern basis with no minority discount or control premium, permitted transfers to affiliates, family and trusts require the transferee to join the agreement, and a deadlock exists only after a matter has failed at two meetings.

Who signs it and in which role

The Majority Shareholder and the Minority Shareholder, each an individual or an entity, sign it in respect of the company named in the preamble. The parties fill in the company's name, place of incorporation, registered number and address, the board size, the shareholding needed to appoint a director, the body that appoints independent directors, the transaction threshold for approvals, the lock-up period (24 months by default), the minimum dividend percentage, the mediation body (CEDR by default), the number of years before exit rights start (5), the non-compete area, the court location and the arbitral institution (ICC by default).

Key clauses

The agreement has 13 negotiable clauses, each with three options.

Board composition

The majority appoints most directors and the minority one, with one independent director agreed by both; or each side appoints the same number and an independent chair holds the casting vote; or seats are allocated in proportion to shareholdings and recalculated when holdings change.

Reserved matters

A broad list of decisions that need the minority's consent, covering financial, operational and structural matters; a standard list limited to fundamental changes; or a minimal list covering only amendments to the articles that harm the minority, new share issues and winding up.

Share transfers

A right of first refusal for the other shareholders; board approval for every transfer, not to be unreasonably withheld; or a lock-up period followed by a right of first refusal.

Tag-along and drag-along

Both rights, with the drag at 75%; tag-along only; or tag-along with a drag at a higher 90% threshold. Where there is more than one class of shares, the drag options allocate the price according to the liquidation preference order rather than the same price for every share.

Pre-emptive rights

Each shareholder may subscribe pro rata for new shares; or may also take up shares that others decline (super pro rata); or there is no contractual pre-emption.

Dividend policy

A mandatory minimum share of distributable profits each year, which all shareholders may waive unanimously; board discretion with an annual review and written reasons for not paying; or full reinvestment.

Information rights

Comprehensive information (audited annual accounts, monthly management accounts, the budget and inspection of the books); annual audited accounts with quarterly summaries; or the statutory minimum.

Anti-dilution

A broad-based weighted average adjustment for the minority if shares are later issued at a lower price, a full ratchet to the new price, or no adjustment.

Deadlock resolution

Negotiation, then mediation, then a compulsory buyout at fair market value; a shoot-out, where one party names a price and the other must buy or sell at it; or binding expert determination.

Exit mechanism

A minority put option at fair market value after a set period, an IPO target with a sale process and put option as backstop, or no specific exit mechanism.

Shareholder non-compete

A restriction during the shareholding and for twelve months after, including non-solicitation; a restriction during the shareholding only; or none, leaving fiduciary duties and confidentiality.

Governing law

California law, the law of England and Wales, or arbitration under rules the parties choose, with a governing law that should match the place of incorporation.

Agreement and articles

New in this version. The agreement can prevail between the shareholders, with an undertaking to amend the articles; the articles can prevail; or the parties can list the protections that prevail, with everything else following the articles.

What the two sides usually negotiate

Almost every clause has one option for each side and a balanced option. The Majority Shareholder generally prefers a board it controls, minimal reserved matters, no pre-emption, reinvestment, minimal information, no anti-dilution, no exit mechanism and articles that prevail. The Minority Shareholder generally prefers a broad veto, tag-along only, a minimum dividend, full information, a full ratchet and a put option.

When the parties choose differently, Dealroom proposes the balanced positions in the skill:

• Board: proportional representation.
• Reserved matters: the standard list.
• Transfers: right of first refusal.
• Tag and drag: both rights, with the drag at 75%.
• Pre-emption: full pro rata rights.
• Information: standard rights.
• Anti-dilution: broad-based weighted average.
• Deadlock: mediation then buyout.
• Exit: an IPO target with backstop.
• Non-compete: during the shareholding only.
• Governing law: all three options are neutral.
• Agreement and articles: a bespoke order of precedence.

On the dividend policy there is no fully neutral option; board discretion with an annual review is the closest to the middle and leans slightly towards the majority. On deadlock, the shoot-out is scored in favour of the majority and expert determination slightly in favour of the minority.

Jurisdictions and languages Dealroom supports for it

Dealroom drafts this agreement under the law of California or England and Wales, in English or Spanish. The Spanish version is a rendering of California or English law drafting, not Spanish law.

• California: the agreement records that non-competes on shareholders may be void under Business and Professions Code section 16600, and the option for a non-compete after the shareholding ends is not available. Pre-emption rights are contractual only. English law cannot be chosen for a California company.
• England and Wales: the contractual pre-emption supplements the statutory right under section 561 of the Companies Act 2006; nothing excludes an unfair prejudice petition under section 994 or a just and equitable winding up; and a data protection provision applies. California law cannot be chosen for a UK company.

For shareholders of a Spanish company, use the Spanish shareholders' agreement.

Common mistakes

• No dividend policy. Without one, the majority can reinvest all profits indefinitely and deny the minority any return.
• No exit mechanism. In a private company with no market for shares, the minority may be locked in indefinitely.
• Letting the articles prevail without a veto on amending them. The majority can then change the articles and erode the agreement.
• A flat same-price drag across share classes. Where classes have different preferences, the price must follow the agreed order of payment.
• Ignoring information rights. A minority without a board seat depends on them.
• A post-shareholding non-compete in California. It is generally void there.
• A governing law that does not match the company. The template blocks California law for a UK company and English law for a US one.