We have already previously in our blog post Tell us more about the content of a shareholders' agreement and the matters that can be agreed upon in a shareholders' agreement. In this article, we will explain in more detail why those considering establishing a limited company with business partners should definitely include the drafting of a shareholders' agreement as part of the ABC package for setting up a company.
Setting up alimited company
Founding a limited company becomes relevant for many when their business expands and the associated risks increase, or when more than one entrepreneur becomes involved. Despite this, founding a limited company is a significant step for many, at least conceptually, even though, for instance, the requirement for €2,500 in share capital no longer exists. A limited company always brings up many questions regarding, among other things, the company's financing and taking on business risk.
As a technical feat, establishing a limited company is now quite easy. In the quickest cases, a limited company can be established in about fifteen minutes using the PRH's electronic system. Although lowering the barriers to entrepreneurship is excellent in all respects, it might still be advisable not to establish a company on a mere whim. Since a well-planned endeavour is half done, practical matters related to the company's administration and working within the company should be considered with sufficient detail even before establishing the company. In certain situations, this also involves drawing up a shareholders' agreement.
The shareholders' agreement lays down the rules for cooperation.
A shareholders' agreement is a very important instrument when a company to be established has more than one shareholder. The shareholders' agreement becomes relevant at the latest when investors join the company. A shareholders' agreement refers to an informal agreement between the company's shareholders, in which they agree on the rights and obligations that shareholding in the company entails. Since companies are very diverse, there is naturally no single, definitive answer as to what a shareholders' agreement should look like.
Nothing can go wrong, can it, when life has gone well so far and without any major conflicts?
If future business partners are already known, one might easily think that there is no need to draft such an informal agreement. Of course, this may continue to be the case, but perhaps based on general life experience, it can be said that sooner or later, situations will arise between shareholders where consensus is difficult to reach. The perhaps significant value of a shareholders' agreement lies in the fact that it forces the company's shareholders to consider in advance the rules by which the company is managed and administered. When the rules are clear to all shareholders in advance, future disputes are also avoided. This way, instead of resolving conflicts, the company can focus on what it does best.
The Companies Act provides a framework within which the ”company game” can be played. However, it is sometimes possible to reach a stalemate. For example, in situations where a company has two shareholders who each own half the company, and the shareholders disagree on a matter to be decided, the company's decision-making is completely paralysed. The required majority decision cannot be reached. Since such situations will inevitably arise sooner or later, a shareholders” agreement can be used to prepare for such situations in advance. A shareholders” agreement can also flexibly stipulate what happens to a shareholder's ownership in the company upon cessation of their employment with the company, the conditions under which shares can be transferred, or how decision-making is to be carried out in a potential acquisition situation. These are just a few examples of the diverse possibilities of a shareholders' agreement.
Drafting a shareholders' agreement
It is worth investing time and care in drafting a shareholders' agreement. A shareholders' agreement drafted in haste and carelessly can, in the worst-case scenario, even complicate the company's operations if ambiguous or outright poor clauses, relative to their purpose, are included in the agreement.
”The ”let's just get this over with" mindset isn't suitable for shareholder agreements.
We recommend enlisting the help of a professional lawyer when drafting a shareholders' agreement. Although a shareholders' agreement is essentially an expression of the shareholders' will, it must be formulated taking into account aspects that a lawyer is best placed to advise on. In our work, we have seen shareholders' agreements that complicate rather than facilitate the running of a business. However, the added value that a carefully drafted shareholders' agreement can bring to a company cannot be denied.
A shareholders' agreement might very well be your company's most important agreement.
The article was written by a trainee lawyer Santeri Valkamo. You can check our price list Here.