SHAREHOLDERS' AGREEMENT

What is a shareholders' agreement?

 

A shareholders' agreement is an agreement drawn up by the shareholders of a limited liability company to agree on their mutual rights and obligations towards each other and the company. The shareholders' agreement or its content is not defined in the Finnish Companies Act, and the Companies Act does not mention concept of a shareholders' agreement.  What is the relationship between the Companies Act and the shareholders' agreement?

 

Among other things, the Companies Act sets out the minimum requirements for the formal decision-making of a limited liability company. Shareholders may agree on common rules how the company makes the decisions required by law. In practice, this means that upon the shareholders' agreement the shareholders may agree on the principles and conditions that will be implemented in the management and other activities of the limited liability company.

 

The main relation between the shareholders' agreement and the Companies Act may be simplified as follows: The Companies Act regulates how decisions concerning the company should be formally made. With a shareholder agreement, shareholders can mutually agree on what is intended to achieve with the resolutions.

 

What is agreed on with the shareholder agreement?

 

As there are no statutory requirements for the content of the shareholders' agreement, the content of the agreement is largely up to the shareholders to decide. However, the shareholders' agreement is limited by general principles of contract law, such as fairness, and mandatory legislation.

 

The content of the shareholders' agreement varies depending on what is essential in the relationship between the shareholders and what the shareholders want to agree on with the shareholders' agreement. Despite the wide freedom of contract, a few key themes are often repeated in the shareholders' agreements, such as transfer of shares and distribution of funds.

Why does the shareholders' agreement contain provisions on the transfer of shares?

 

One of the most important functions of a shareholders' agreement is to control the transfering of the company's shares. In most cases, shareholders do not wish to have third parties as the shareholder of the company unless the shareholders or the company's board have jointly agreed on such new shareholders joining the company.

 

As the Companies Act does not restrict the transfer of the shares, the shareholders may agree on restrictions for transferring the company's shares applicable to different situations and explicitly agree on third parties to whom the shares may be transferred without restriction. If the shareholders do not agree on common terms for transferring the company's shares, third parties may become shareholders in the company in an uncontrolled manner, for example through share transactions made by one shareholder.

 

Company management, financing and asset allocation

 

Another key function of the shareholders' agreement is to agree on the management, financing and distribution of the company's assets. With the shareholders' agreement the shareholders usually agree on the composition of the board and the decision-making criteria. For example, shareholders may agree on whether all decisions are subject to the minimum requirements of the Companies Act or whether a decision requires a higher majority of votes than required by the Companies Act.

 

Shareholders may also agree on matters affecting the election of board members. These may include, for example, the qualifications of the members of the board of directors or the right of the shareholders to appoint their own representative to the company's board of directors.

 

It is recommended to clearly agree on the financing of the company and the basis for the distribution of dividend to the shareholders with the shareholders' agreement. Without a separate agreement, the parties may end up with different views on how the company's income is used and who is responsible for financing the company.

 

What else is agreed with the shareholders' agreement?

 

The role of the shareholders in the company depends a lot on the size of the company and the basis on which the shareholder has become a shareholder. One essential thing to agree between the shareholders is whether the shareholders are required to work for the company. The shareholders may agree among themselves, for example, that at the end of the shareholder's employment contract, the shareholder must transfer his/her shares to the company in return for the compensation specified in the agreement.

 

Restrictions on what kind of tasks shareholders can take on outside the company are usually also agreed between the shareholders. Possible restricted tasks should be stated clearly in the agreement in case the agreement includes a non-compete clause.

 

The shareholders' agreement also protects the company and the preservation of its competitiveness. From the company's point of view, the most important resources to be protected are, depending on the company's industry, e.g. employees, know-how and other intellectual property rights. In order for no shareholder to take advantage of the company's competitiveness at the expense of other shareholders, the shareholders' agreement often inlcudes provisions for intellectual property rights, confidentiality and non-competition and non-solicitation clauses.

 

In addition, the shareholders' agreement, like any other agreement, includes a provisions for agreement breaches, such as a contractual penalty.

 

Why to draw up a shareholders' agreement?

 

The shareholders' agreement aims to prevent disputes between the shareholders. It is advisable to draw up a shareholders' agreement whenever the company has more than one shareholder. The shareholders' agreement also facilitates the management of the company in accordance with the jointly agreed rules.

 

Written agreement is also the most liable way to prevent problems in potential disputes as the intention of the shareholders is clearly stated within the agreemetn text. The shareholders' agreement therefore serves as strong proof of the will of the parties at the time of the drafting of the shareholders' agreement.

 

The agreement usually includes on a dispute resolution clause for a situation where the shareholders cannot reach an agreement on a matter concerning the company. Agreed dispute resolution mechanism hepls to avoid unnecessary costs in the event a dispute arises.

 

When is it timely to draw up a shareholder agreement?

 

The shareholders' agreement is easier to draft when there are fewer shareholders. For this reason, it is recommendable to draw up the shareholders' agreement already at the early stage of the company. A carefully drafted shareholders' agreement in connection with the establishment of a company is a good way to avoid disputes between the shareholders and to ensure that all parties join the company as shareholders in accordance with the mutually agreed terms.

 

In a start-up, for example, exit situations don't always seem topical. However, basic mattesrs such as the transfer of shares should always be clearly agreed regardless of the size and growth stage of the company.

 

If necessary, the shareholders' agreement may be amended or updated at any point by a mutual agreement of the shareholders. An update may be necessary if the company's ownerships or scope of business are about to change. As the company grows, it is also possible to separate the so-called the main shareholders' agreement and the minority shareholders' agreement.

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