Protections for minority shareholder in SHA (shareholders agreement)


We are in early startup phase. One founder has a big majority stake and we are co-founders with small 5 minority stake. We have good relations and we are happy with the stakes, but we would like to get reasonable protection to the shareholders agreement in case things "go bad". We are based on European Law, where the majority shareholder can take over or squeeze out minor shareholders in case they have 95% or more of the stocks.

We will invest lot of time and energy to the project, we would like to be sure to get our portion of the growth of company value. I have been thinking of measures like:
* Minimum price (growing annually) of the stake in case the majority shareholder wants to push us out?
* Dilution - Unanimous voting would be required to issue new shares?
* Unanimous voting for business critical decisions - which ones should I consider?

What are your suggestions and experience, which other risks or protection should I negotiate and write into the SHA. I really appreciate your help and advice, thanks in advance :)

Contract Legal Founders Agreements

asked May 4 '10 at 23:59
11 points
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2 Answers


and welcome to this site.

Hmn, I'm having some trouble recalling all the provisions we used last I had this kind of issue. The following list may be incomplete. Under all circumstances, this is really a question I recommend you go talk with a professional about -- i.e. go see a good lawyer please.

  • Regarding minimum price for buying up shares: I question whether one can devise a pricing formula that will fit all future scenarios. We were not in a situation were any single founder could 'push' others out against their will, so our solution was to give remaining shareholders a right of first refusal on share sales.
  • Dilution: Again, we used a right of first refusal to allow existing shareholders to take part in capital expansions, pro rata. If you're hoping to attract venture capital, then you should consider this carefully -- if you have unclear or bad legal clauses in this area, then venture capitalists can loose all interest in you.
  • Regarding "Unanimous voting for business critical decisions": This is a difficult one. Personally, I feel you're restricting the business too much if you require this, and that it sets a unfortunate tone of everyone being allowed to meddle in things they don't necessarily understand. If I was the majority shareholder or the CEO then I would object to such a provision.
Other suggestions:
  • Exclusivity on majority shareholders work. This can be a biggie, but one of the easiest and strongest ways to control a majority shareholder is to disallow him from taking part in any other business without minority shareholder approval. He can of course require the from all other shareholders...
  • Market rate salary and mutual agreement on salaries. You might want to require mutual agreement on shareholder salaries. If someone gets an above market rate salary, then the possible dividend to all shareholders is reduced. Thus that individual can get more money than his ownership share (% of dividends) would entitle him to.
  • No transfer of business activities or assets, no cooperation with other businesses where a shareholder is involved: You might want to require mutual agreement before anyone can sign partnerships with other companies that transfer a business activity or asset out of your company. Especially if another shareholder is also active in any way (working in, shareholder in) the receiving company. One case of this can be exclusive sales partnerships, i.e. someone gets exclusive rights to sell the product in a territory, and a percentage cut of all sales in this territory -- that's one example of what you don't want.
  • Inheritance: You might want to consider the situation where one shareholder dies prematurely.
Lastly: Remember balance when dealing with the negative stuff -- you have a legitimate reason to want to 'tie down' the majority shareholder so he can't cheat you, but you must balance this against your need to appear constructive and good at making the pie bigger for everyone involved.
answered May 5 '10 at 05:15
Jesper Mortensen
15,292 points
  • +1, fantastic advice – Jason 14 years ago


+1 on Jesper of course.

I'm not familiar with European law, but in the States you typically have "Corporate Bi-Laws" which lay out how the business expects to behave. That would be another way to state expectations. If those are not met -- or even if the board (i.e. the majority holder) revokes them -- you have some recourse.

Another idea is to create a bloc -- set aside 6% (or whatever is past that "he can squish us" limit) and divide the bloc amongst yourselves. That way the majority holder can't exercise special rights.

answered May 6 '10 at 00:06
16,231 points

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