What are the Commonly Made Mistakes While Drafting a Shareholder’s Agreement?

One should keep in mind some commonly made mistakes; before proceeding with a Shareholders Agreement:-

The Input of Ambiguous Provisions -Wrong/Unnecessary laws

The utmost craft must go into drafting a shareholder’s agreement considering the importance of rights of the shareholder and such a deal in the working of the company. A Shareholder’s agreement with unclear or vague provisions will raise disputes and open doors for never-ending litigation.

Moreover, it is more likely to be satisfied in full essence as then it establishes obligations, a strict web of rights, and manner of regulation if the terms of the shareholders’ agreement are clear. To maintain the interests of both the parties and draft a sound agreement, it is for this purpose that one must choose a lawyer with skills of negotiation.

Forgotten to Refer Capital Dividend Account

Shareholders get their ‘capital dividends’ without paying taxes by a Capital Dividend Account (CDA), a corporate tax account. Capital Dividend Account is essential while drafting any shareholders’ agreement. It is no surety that as a shareholder, you should get the best tax benefits in future without such a clause relating to CDA and the payment of capital.

Indistinct Reference for the Owner’s Policies

It might not always be the ideal if an operating company is made the owner and beneficiary of any policy (such as a life insurance policy). This is so because an asset is determined based on the capital gain exemptions; it creates for a corporate-owned structure. Therefore, a life insurance policy is not continuously the best-suited.

Unrefined Drag-Along and Tag-Along Rights

The tag-along right requires majority shareholders to allow the minority shareholders to sell their shares at the same price. In contrast, Drag along rights enables the minority to sell their shares. All these rights are super crucial for start-ups companies.

If 1 or more shareholders are selling their shares, the tag-along rights give protection, higher liquidity, and exit route for minority shareholders. However, the drag-along rights do not allow the blocking of the company (supported by the majority shareholders) by the minority shareholders. Those are known to be preventive by nature. Such rights should be visibly stated in a shareholders’ agreement, and else it takes malicious forms for the development of the company.

Note:- Both these clauses balance each other out.

Non-Compulsory Buyouts

The sales and purchase of the demised shareholder’s shares should be made mandatory upon the event of the death of a shareholder. Any unpredicted circumstances may be omitted here. The choice of a buyout may be attractive for existing and new shareholders. Moreover, the clause must be made flawless so that your business is not put in danger while expecting the disposal of the shares.

You may also want to know the difference between a Shareholders’ agreement and a Share Purchase agreement before drafting. Get in touch with Canjain expert lawyers to get your Shareholders’ Agreement drafted flawlessly.

Tips for Drafting a Shareholders’ Agreement

• It is vital to understand the perseverance and purpose behind the Shareholders’ Agreement and the necessity to create a balance of interests of the company.
• So as to avoid any further confusion, the terms of the agreement need to be clearly defined.
• The duties, rights, and obligations of the company and shareholders must be detailed in a crisp manner
• The agreement must be airtight bearing in mind the mutual benefit of both the company and the shareholders
• The procedures, policies, and guidelines set out in the shareholder’s agreement must be brief and intelligible.
• All substances set out in the agreement must be delivered following the relevant laws in place. It means no vague provisions should be inserted.