Don't get Facebooked: This is why you need a shareholders agreement!
Everyone knows the story: Why did Eduardo Saverin lose a large chunk of his Facebook stocks? Because Mark Zuckerberg diluted Saverins’ share of the company from 24% to 10%. How was Mark Zuckerberg able to do this? The answer is easy…. they did not have a shareholders agreement.
Entrepreneurs tend to have the same attitude: They come up with a great idea, and start a company. No time is wasted on the articles of association. Everything is settled on a gentlemen's agreement.
There is nothing wrong with this attitude at all, especially during the startup phase. But the Facebook-case shows that the consequences can be severe. Not only when you are a big-shot multinational, but also SME companies get torn apart due to disputes between the two shareholders. The downside of equal voting rights is that you might not get anything settled during a dispute.
So what's the right (or at least, most common) approach, when you start a Dutch business with multiple shareholders?
Step 1: Draft Formation Deed/Articles of Association (cover the basics on how your business will be run)
Step 2: Incorporate the Netherlands Company
Step 3: Draft a shareholders Agreement (and discuss the details on how shareholders will settle affairs)
What is the difference between the Formation Deed and the Shareholders Agreement?
The articles of association are mandatory when a company is incorporated. Also they are a public document, meaning that anyone is entitled to view their contents. The articles of association, and all changes to them, must be registered with a public notary and therefore cost money. The formation deed is subject to statutory law and therefore must comply with this law.
The shareholder's agreement is a contractual agreement between the shareholders. In this agreement, the shareholders make an outlining how the company will be run. A Shareholders Agreement is subject to contract law, meaning that they can contain almost everything. The Shareholders Agreement is not public, so third parties can't see them. Changes to this agreement don't have to be registered with a public notary and therefore are free.
After the document is signed the shareholders agreement prevails above the articles of association! This means you don’t have to change your original Articles, which in effect makes it easier to start your business, without considering every single detail.
The importance of the agreement is to protect the investment of the shareholders and to establish a fair relationship between them. This way disputes or legal actions can be avoided.
What can be arranged?
Everything can be arranged in a shareholders agreement. This most important issues that should be included in the arrangement are:
The outline of how the issue of new shares will be carried out;
The appointing and removing of directors;
The financing of the new company;
The shareholder's rights and obligations;
The outline how the sale of shares needs to be carried out;
How important decisions should be made, and who will be involved in these decisions;
A dispute resolution procedure.
As we mentioned above Facebook is the prime example of how not having a shareholders agreement damages reputation and relationships. It is normal that shareholders disagree on some issues. When a shareholders agreement is drawn up, it is clear how to settle these disagreements. After that you can move on and do what you do best: Grow your Dutch Business!
When things do get out of hand, the shareholders agreement provides an exit strategy.
Once your Dutch business is incorporated...
When the company is up and running then it is time to make up a shareholders agreement.
In the beginning of the company most shareholders have the same vision and expectations for the company.
When a shareholders agreement is postponed, the expectations of the shareholders may have developed in different directions. At this moment it is more difficult to make decisions on terms that should be in the shareholders agreement.
Don't get ‘Facebooked’. Above we have described what should be in the shareholders agreement and what can happen when you don't have one. We can help you and the other shareholders by drawing up the shareholders agreement with you.
P.S. Did you know you can also involve investors, and offer them a size of the profit, without offering them any voting rights?
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