The clause your shareholders' agreement is missing
Most agreements handle ownership fine. Almost none handle exit. Here's what gets left out, and what it costs when someone wants to leave.
Every shareholders’ agreement we’ve inherited from another firm has at least one thing right: it names the shareholders, the shares, and who signs what. The better ones go further: they set out board composition, reserved matters, pre-emption on new issuances. A few even cover deadlock.
The ones that cost us six weeks to untangle are the ones that do none of that for exit.
What’s usually there
- Pre-emption on transfers (if A wants to sell, B gets first refusal).
- Tag-along / drag-along (if a buyer wants 100%, minorities must follow; if majority sells, minority can come along).
- Deadlock mechanics (sometimes, often a reference to mediation with no teeth).
What’s usually missing
- A working valuation method that doesn’t depend on both parties agreeing at the moment they’ve fallen out. Independent valuer, defined scope, binding on both sides, payable by the party triggering the clause.
- A payment schedule for buyouts that doesn’t require the departing party to lend their own money back to the company for five years at 0%.
- A non-compete that the court will actually enforce: narrow by scope, narrow by geography, narrow by time. We’ve seen four-year Singapore-wide non-competes that no Singapore court will touch, written by people charging by the hour.
- A definition of “cause” for removal from the board and from employment, distinct from shareholder exit. The three are usually conflated.
- A clause that says: “If any of the above can’t be agreed in 30 days, here is who decides and how.” Not “the parties shall meet in good faith.” That phrase has never solved a dispute.
Why this matters at 2am
When a founder messages you at 2am that their co-founder changed the bank signatories, you don’t want to be reading their 2019 shareholders’ agreement to find out it says “the parties shall resolve disputes amicably.” You want it to say: On a deadlock continuing beyond 14 days, A may serve a buy-out notice at a price of X, payable as Y, on Z mechanics.
One of those is a clause. The other is a wish.
What we recommend
Before you sign the next one, read your current one backwards. Start at “what happens when someone wants out” and work toward the signatures. If the answer to that question is unclear, or depends on the goodwill of the person you’re about to fall out with, the document has a hole.
That’s the clause to fix this quarter, not next year.