The answer first
A shareholders' agreement is a private contract between the shareholders, and usually the company, that sets out how the company will be owned and run, and what happens when things change. It is not required by law, but where there is more than one shareholder it is one of the most valuable documents a company can have, because it is signed while everyone still agrees.
It is private and not filed with the Companies Registry, unlike the articles. It should be consistent with the articles; where they conflict, problems follow, so draft them together.
At a glance
- Required by law?
- No
- Public?
- No; a private contract
- Covers
- Decisions, funding, transfers, leavers, deadlock, exit and disputes
- Drafted by
- Hong Kong lawyers, with tax input where needed
What a shareholders' agreement covers
| Area | Typical provisions |
|---|---|
| Management | Board composition, appointment rights, reserved matters needing shareholder approval |
| Funding | Future capital calls, shareholder loans, consequences of not funding |
| Transfers | Right of first refusal, tag-along and drag-along rights, permitted transferees |
| Founders and leavers | Vesting, good leaver and bad leaver provisions, non-compete and non-solicit |
| Dividends | Dividend policy |
| Deadlock | Escalation, mediation, buy-sell mechanisms |
| Exit | Sale, listing or wind-up procedures |
| Disputes | Governing law, arbitration or courts |
| Confidentiality | Protection of company information |
When you need one
- Two or more founders starting a company together.
- An investor buying into the business.
- Family members holding shares across generations.
- A joint venture between companies.
- Key employees receiving shares.
Key takeawayThe best time to agree what happens when a founder leaves is before anyone wants to leave. Afterwards, every term becomes a negotiation.
Common gaps
- No mechanism to value shares when a shareholder leaves.
- No resolution of deadlock between 50:50 shareholders.
- No obligation on a departing founder to transfer shares.
- Articles left in model form, conflicting with the agreement.
- The company not made a party, limiting enforcement.
Legal advice requiredShareholders' agreements are legal documents with long-term consequences. They should be drafted and reviewed by Hong Kong lawyers, with tax input where shares or options are involved.
Self-check: where do you stand?
| Question | If the answer is no |
|---|---|
| Does your company have only one shareholder? | Consider a shareholders' agreement |
| Is there a process if a shareholder wants to leave? | Agree valuation and transfer terms |
| Is there a deadlock mechanism? | Add one, especially for 50:50 ownership |
| Are the articles consistent with the agreement? | Align them |
| Are founder shares subject to vesting or leaver terms? | Discuss with co-founders and lawyers |
How DBMS Global can help
- Helping you identify the issues to agree before instructing lawyers.
- Aligning the articles and corporate records with the agreement.
- Share transfers, allotments and filings when the agreement is used.
- Shareholders' agreements are drafted by lawyers; MAP Asia Pacific advises on commercial terms in joint ventures and investment rounds.
In summary
- A private contract that prevents expensive disputes.
- Agree leaver, deadlock and exit terms early.
- Keep it consistent with the articles.
Official references
- Companies Ordinance (Cap. 622)
- Hong Kong International Arbitration Centre, www.hkiac.org