If you are raising capital and bringing on a new investor it is essential that you have a strong shareholder agreement in place. It might seem very unlikely now that you could ever fall out with your best friend investor. But people do! A shareholder agreement also helps all parties understand clearly their rights and obligations. This article considers key commercial areas to consider:
Restraints on trade – non compete
Make sure your shareholders can’t compete with your business. Or when they stop being a shareholder they can’t take all that knowledge and set up in competition.
Do the shareholders have any rights in running the business? Can they get involved in the management and operations of the company or are they silent investors?
Transfer of shares restrictions
How are shares to be transferred? Do other shareholders have first rights of refusal? Are there limits on who the shares can be transferred to?
What value is to be set on those transfer shares? How is the value determined? Is a value or a formula specified in the agreement or is a certain type of independent valuer specified? What if the shareholders don’t agree on the value and how is that resolved?
Drag-along and tag-along
This provision allows the majority of the shareholders to force the minority to sell their shares. This ensure the entirety of a company can be sold to a third party and a minority can not prevent the sale
This is the opposite to the drag along provision. It allows minority shareholders to tag along with the majority on a sale to a third party at the same price and on the same terms and conditions.
About the Author
Simon is a CA Accredited Business Valuation expert, Chartered Accountant and a Certified Fraud Examiner. Simon specialises in providing start-up, virtual CFO and valuation services. Prior to founding Lotus Amity, he was a Corporate Finance partner with BDO Australia. He has worked with many businesses helping them grow. Simon’s services include raising finance, strategy, cash flow management and performance analysis.
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