Key Terms of SHAs
Shareholders’ Agreement – Key Terms to Consider
Are you planning to found a new venture with several co-founders? Would you want to leverage outside financing in the future to fuel your growth? Or is there perhaps a need to incentivise employee shareholders via a vesting schedule?
If your answer is yes to any of the questions above, then you should consider entering into a shareholders’ agreement (SHA). This should always be done already before you launch your business, as shareholders’ interests are typically still well-aligned, which makes it easier to agree upon key matters. Negotiating a SHA is also a great opportunity to discuss fundamentally important topics (such as exits) before diving head first in to the venture.
A SHA regulates the relationships between the owners of the company and works as a governance “playbook”. And as each company is different, each SHA should be tailored to fit the need of the company and shareholders in question. For example, if you’re preparing a SHA for a start-up (without outside investors), you should pay particular attention to the following matters:
Decision-making: Have you considered whether there are certain company matters that should be passed only by qualified majority or even unanimously by the shareholders?
Working obligations: Are there different types of shareholders in the company? Perhaps some founders are also employees and others remain as pure investors? In such scenarios, the SHA could include provisions on the working obligations of the employee shareholders and provide transfer restrictions if employment is terminated.
Profit sharing: Is there any need to deviate from the provisions of the Finnish Companies Act (majority of the shareholders may resolve upon distributing all distributable funds) in terms of future profit sharing? If so, the SHA should set out the company’s profit sharing policy.
Transfer restrictions: Often shareholders want to avoid a free transfer of shares. This is often addressed through a right of first refusal and tag & drag along clauses. It is advisable (especially taking into consideration the latest Finnish Supreme Court precedent (KKO 2020:341)) that redemption price and process are defined in detail in the SHA and also incorporated into the Articles of Association of the company.
Vesting: Do you need incentivize employee shareholders? A vesting schedule providing for a temporal cliff for the vesting of the shares held by the employee shareholder is generally a good solution.
Exit plans: Is the endgame an exit through an M&A transaction or aim for an initial public offering? If so, you should take into consideration the different options for potential exit plans and incorporate them into the SHA.
Non-compete: Consider whether it is allowed for a shareholder to compete with the company. And if not, should the non-compete clause be tied to their shareholdings in the company?
Breach of contract: If a shareholder breaches the provisions of the SHA, what kind of consequences are agreed and is a remedy period needed during which the shareholder may remedy its breach? It is often advisable to agree on contractual penalty to ensure enforcebility. And in case of severe breaches, perhaps even on a mechanism to redeem the shares held by the breaching party.
Having a SHA in place mitigates risk for further disputes and minimises the associated costs. Furthermore, if you are aiming to accelerate your growth through outside funding, having a proper SHA in place is one of the key legal elements making your company attractive to potential investors.
Want to know more?
If you would like to know more, we have prepared a SHA Key Term Sheet that provides further information on the key terms to help you consider what elements you may want to include in your SHA. You can download the SHA Key Term Sheet by submitting your email address below. We will not send you spam, but we may be in touch to see if we could help you with your venture.
