Shareholder agreement template: what every clause does
A walk through the key clauses in any standard shareholder agreement, and why each one matters.
A standard shareholder agreement contains around 20 distinct clauses, each addressing a specific aspect of the shareholders’ relationship. The most consequential are decision thresholds, share transfer restrictions, drag-along and tag-along, exit triggers, valuation mechanics, non-compete, and dispute resolution.
Decision thresholds
Different categories of decisions need different approval levels. Day-to-day: simple board majority. Major decisions (selling assets, taking on debt): supermajority. Fundamental decisions (changing the constitution, winding up): unanimous. The agreement defines the categories.
Share transfer restrictions
Pre-emption to existing shareholders is the standard – shares can’t be sold to outsiders without first being offered to current shareholders at the same price. Variations include rights of first refusal, rights of first negotiation, and outright transfer prohibitions.
Drag-along and tag-along
Drag-along: majority can force minority to sell on the same terms when a third party makes an acquisition offer. Tag-along: minority can require their shares to be included in any majority sale, on the same terms. Both protect the parties from being trapped.
Exit triggers
Death, permanent disability, long-term illness, divorce, bankruptcy, breach of agreement. Each trigger usually forces the affected shareholder to sell at a pre-agreed valuation, often funded by insurance.
Valuation mechanics
Fixed multiple of earnings, independent valuation by a nominated firm, or a formula. Whichever method, the mechanism must be clear so disputes don’t arise on actual exit.
Non-compete and non-solicitation
Exiting shareholders typically can’t compete with the business or solicit clients/staff for a defined period. Enforceability depends on reasonableness – too broad won’t hold up, too narrow doesn’t protect.
Dispute resolution
Mediation first, then arbitration or litigation. Often nominates a specific mediator or institution. Saves significant cost vs court litigation.
Summary
A walk through the key clauses in any standard shareholder agreement, and why each one matters.
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Disclaimer: This article is general information only and does not constitute legal advice. Estate planning is deeply personal - every family's circumstances are different. For advice specific to your situation, please contact Rosewood Succession Solicitors.