Iiro Säilä | | Advisory Services, General

Shareholder of the limited company, be sure to draw up a shareholder agreement

The operations of limited companies are regulated by the Companies Act, which obliges limited companies to draw up articles of association. However, it is not always possible or necessary to record all matters relevant to the company’s operations in the Articles of Association. It is advisable for the shareholders to draw up a shareholder agreement, which will make it possible to agree on common rules of the game and to prevent conflicts between the shareholders.

In this article, we explain why drawing up a shareholder agreement is profitable for the shareholder, what things should be recorded in the agreement and what should be considered when concluding the agreement.

What is a shareholder agreement and what is it used for?

A shareholder agreement is an agreement between the shareholders of a limited liability company. In the agreement mutual rights and obligations of the shareholders in relation to the company and the company’s other shareholders are agreed.

The shareholder agreement typically agrees on the organization of the company’s limited liability company, the conduct of the company’s business and the use of the company’s assets. In addition, the shareholder agreement often provides for the ownership and transfer of the company’s shares. When drafting a shareholder agreement, the parties to the agreement have a wide freedom of agreement, which makes the shareholder agreement an excellent tool for supplementing the provisions of the Companies Act and the Articles of Association.

A shareholder agreement can secure a shareholder’s position in the company and build trust between the parties. Its aim is to promote the achievement of common goals and prevent operational risks. The agreement aims to form a common vision of the shareholders on how the company will be developed and taken forward.

Why draw up a shareholder agreement?

The ultimate purpose of drafting a shareholder agreement is to prevent shareholder disputes. When the common rules of the game on running the company are clear to the parties, disputes will be less likely to arise. The shareholder agreement is not public, so it can also be used to agree on things that are not desired, for example, for the company’s competitors.

The shareholder agreement may agree on matters which, according to the Companies Act, cannot be agreed or otherwise desired to be agreed in the Articles of Association. Thus, for example, the rights of a shareholder can be improved and, correspondingly, the rights that a shareholder would have under the law can be waived. The shareholder agreement can also be used to agree on the shareholder’s obligations to the company or other shareholders that he or she would not otherwise have based on the shareholder’s status or legislation.

When is the shareholder agreement drawn up?

Usually, a shareholder agreement is drawn up when a limited company is established or when new external shareholders join the limited company. Several shareholder agreements may also be drawn up in one limited liability company if it is necessary, for example, to agree on matters with the new shareholders in a different way than has previously been agreed with the old shareholders.

What is worth agreeing on in the shareholder agreement?

Usually, the shareholders’ agreement includes, among other things, the parties to the agreement, the background and purpose of the agreement, the organization of the company’s administration, and matters concerning the company’s decision-making and share exchange.

The background and purpose of the contract should be recorded in the contract because it is easier to interpret the contract later, when the circumstances in which the contract was drawn up are known. Matters to be agreed on the organization of the company’s administration are typically the appointment of the Board of Directors and the agreement on operating practices in situations where the company’s Board of Directors or shareholders disagree with each other regarding decision-making.

In addition, it may also be agreed, for example, that a nominated shareholder’s veto right when deciding on significant matters. Issues to be agreed on the exchange of shares include, for example, the principles for the transfer of shares to new shareholders outside the company. It is also a good idea to include the so-called Tag-along and Drag-along clauses in the agreement, i.e. the right and obligation to co-sell, in which equal treatment of shareholders is agreed in a situation where an external buyer has made a tender offer to a shareholder.

Other key terms of the shareholder agreement include, for example, agreeing on the company’s business, arranging the company’s financing, distributing the company’s dividend, and agreeing on the transfer and redemption of shares. For example, the transfer and redemption of shares should be agreed in advance to avoid unwanted share transfers. In particular, it is advisable to agree on the share repurchase of the company’s management and key personnel tied to the company, for example in view of job change situations, in order to redeem the shares of the key employee who changes jobs.

What should be considered when drafting a shareholder agreement?

In the shareholder agreement, matters concerning the company and its shareholders can be agreed quite extensively and freely. However, it should be recognized that the shareholder agreement is a contract law tool, so its task is to supplement the company’s articles of association and existing company and other legislation. For example, a share redemption clause agreed in a shareholder agreement is not legally binding on a third party acting in good faith. Therefore, in addition to the shareholder agreement, the redemption of shares should also be provided for in the company’s Articles of Association. In addition, it is worth noting that not all the company’s shareholders are necessarily party to the shareholders’ agreement, so it is also worth keeping the company’s articles of association up to date.

The contractual penalty enhances compliance with the shareholder agreement

As the shareholders’ agreement is a contractual document, it is appropriate to include in the agreement a penalty and a sufficiently high contractual penalty to avoid intentional breach of the agreement. It is also advisable to include a contractual penalty in the contract because it is usually very difficult to precisely determine the amount of damage caused by a breach of contract.

We can help draft a shareholder agreement

As the purpose of the shareholder agreement is to supplement the provisions of the company’s Articles of Association and the Company Act, the shareholder agreement must be prepared with the overall picture of the company and legislation in mind. A shareholder agreement should be made to secure the company’s operations, even if the agreement is never needed as a dispute resolution tool. It is recommended that the shareholder agreement is always made in writing with the assistance of an expert.

Iiro Säilä | Financial Advisor

We at Gallant have experience in drafting a shareholder agreement. If you need help, leave us a contact request. We will be happy to help!