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The Millenial businessman
by kevin wu

Geared for the modern entrepreneur, "The Millennial Businessman" is your one-stop shop for navigating the exciting (and oftentimes chaotic) world of business ownership. We break down legal essentials into digestible advice, share actionable hacks for scaling your venture, and explore the unique challenges and opportunities faced by millennial business owners.

The Millennial Businessman

#3 Guide to Essential Provisions in a Shareholders Agreement

A Shareholders Agreement (SHA) is a crucial document that outlines the rights and responsibilities of shareholders in a company, beyond what is stipulated in the company's Articles of Association.  Having a well-drafted SHA fosters transparency, minimizes conflict, and protects the interests of all shareholders in the event the business is successful, or not successful. Here are some key provisions (amongst other key provisions) to look out for in a Shareholders Agreement:

 

Share Ownership and Transfer:

Share Classes: If there are different classes of shares (common, preferred), the SHA should define the voting rights, dividend entitlements, and liquidation preferences associated with each class.

Transfer Restrictions: The SHA can restrict the transfer of shares by requiring shareholder approval, a right of first refusal (existing shareholders get a chance to buy before an outsider), or pre-emption rights (existing shareholders can buy a proportional amount of new shares issued).

Management and Decision-Making:

Voting Rights: The SHA can specify voting thresholds for crucial decisions beyond the simple majority rule (e.g., 75% majority required for selling company assets).

Board Composition: The SHA can dictate how board members are appointed or removed, ensuring representation for different shareholder groups.

Deadlock Resolution Mechanism: A process for resolving disagreements between shareholders, such as mediation or binding arbitration, can prevent gridlock.

 

Financial Matters:

Banking: The SHA can spell out the Maker and Approver of financial transactions going out of the company to ensure proper governance and safeguards in place.

Dividends: The SHA can establish a dividend policy, outlining the frequency, amount, and method of dividend distribution.

Shareholder Loans:  The SHA can address shareholder loans, including interest rates, repayment terms, and subordination (ranking in case of liquidation).

 

Exit Strategies:

Buy-Sell Provisions: These outline how shareholders can exit the company, either through a buy-out by the company or other shareholders at a predetermined price or formula.

Drag-Along and Tag-Along Rights: Drag-along allows majority shareholders to force minority shareholders to sell their shares when selling the company. Tag-along allows minority shareholders to join a sale of the company by a majority shareholder.

 

Confidentiality and Non-Compete Clauses:

These protect the company's confidential information and prevent shareholders from competing with the company after leaving.

 

Dispute Resolution:

The SHA should establish a process for resolving shareholder disputes, such as  mediation or arbitration, to avoid costly legal battles.

 

Review and Amendment Process:

Outline how the SHA can be amended  to reflect changes in the company's circumstances or shareholder needs.

 

Remember: This is not an exhaustive list, and the specific provisions in your SHA will depend on the unique circumstances of your company and the shareholders involved.

 

Here are some additional tips for crafting a strong Shareholders Agreement:

 

Clarity and Specificity: Use clear and concise language to avoid ambiguity and potential future disagreements.

Involve All Shareholders: Ensure all shareholders understand the terms of the agreement and have legal counsel review it before signing.

Regular Review:  Periodically review and update the SHA to reflect changes in the company or shareholder dynamics.

 

Consulting with a qualified lawyer specializing in corporate law is highly recommended to ensure your Shareholders Agreement is tailored to your specific needs and offers optimal protection for all shareholders.

 

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P.S. What are some of the biggest challenges you've faced as a millennial entrepreneur? Share your thoughts in the comments below or email kevin@kevinwuassociates.com! #millennialentrepreneur #businessownership #lawyerlife

 

Disclaimer

The Millennial Businessman is a platform created by Kevin Wu, a lawyer and entrepreneur, to share his insights and experiences in the world of legal and business ownership.

Please note:

  • The content expressed on The Millennial Businessman reflects the personal views and opinions of Kevin Wu only.

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