Prompt Pack Shareholder Agreement Key Terms

Shareholder Agreement Key Terms

When to use this

Use this skill when:

• Shareholders are in early-stage negotiation and need to agree commercial terms before instructing lawyers to draft a full shareholders' agreement (SHA).
• A term sheet or heads of terms for a shareholders' agreement is needed.
• An existing shareholders' agreement is being renegotiated and the key terms need to be reset before a full redraft.
• A new investor is being onboarded and the investment terms need to be mapped before formal documentation.

Relationship to full SHA: This skill produces a key-terms document (commercial term sheet or heads of terms). For the full legal agreement, use [[prompt-pack-shareholders-agreement]]. The key-terms document is typically non-binding on substance but binding on exclusivity and confidentiality.

Key terms to address

The following are the commercially critical provisions in any shareholders' agreement. The key-terms document should resolve each one before a full SHA is drafted.

1. Governance

Board composition:

• Total board size.
• Each shareholder's right to appoint director(s) based on percentage ownership (e.g., 10%+ → 1 board seat; 25%+ → 2 seats; majority shareholder → majority of seats).
• Independent directors: required by institutional investors and listing rules; number and appointment process.
• Chairman: rotating vs. fixed; casting vote.
• Board quorum: minimum attendance; typically requires at least one director from each major shareholder bloc.

Board meeting mechanics:

• Meeting frequency (quarterly minimum is standard).
• Notice period.
• Decision-making: simple majority vs. special majority for specific matters.
• Written resolutions: unanimous or majority?

2. Reserved matters (shareholder veto rights)

Reserved matters require approval above simple board majority — typically shareholder supermajority (75%) or specific shareholder consent. The negotiation is about whose consent is required and what the threshold is.

Typical reserved matters:

MENA note: UAE LLC law requires notarized amendments to the Memorandum of Association for certain reserved matters; the SHA's reserved matters list must be consistent with or supplement what the MOA already requires.

3. Transfer restrictions

Right of First Refusal (ROFR):

• Before any shareholder transfers shares to a third party, they must offer the shares to existing shareholders pro-rata at the same price and terms.
• ROFR exercise period: typically [30/60] days from offer notice.
• Failure to exercise: shareholder may sell to the third party on terms no more favorable than offered to existing shareholders.

Right of First Offer (ROFO):

• Transferring shareholder must first offer to existing shareholders (without stating a price); if no agreement within the notice period, the transferring shareholder may seek a third-party buyer.
• Less protective than ROFR but preferred by sellers because it allows price discovery.

Tag-along rights:

• If a majority shareholder (or shareholder above a threshold, e.g., 30%) proposes to sell, minority shareholders have the right to sell their shares to the same buyer on the same terms.
• Partial tag: proportional right to tag on a proportional basis.
• The buyer must be willing to acquire all tagged shares (or the majority seller cannot proceed).

Drag-along rights:

• If shareholders above a threshold (e.g., 70%/75%) agree to sell to a third party, they may require the remaining shareholders to sell on the same terms.
• Protects majority from being held hostage by a minority blocking a trade sale.
• Fair price protection: drag is typically conditioned on the price being at or above a minimum (sometimes the higher of FMV or a return multiple for the dragged party).

Lock-up period:

• Shareholders may not transfer shares for a defined period (e.g., 18–36 months from the shareholder agreement date), except to permitted transferees.

Permitted transfers:

• Transfers to affiliates, holding companies, or related trusts are typically permitted without triggering ROFR/ROFO; subject to a joinder agreement to the SHA.

4. Anti-dilution protections

Pre-emption on new issuances:

• Each shareholder has the right to subscribe for new shares pro-rata to their existing holding before any new shares are issued to third parties.
• Full ratchet vs. broad-based weighted average anti-dilution:
  • Full ratchet: if new shares issued at a lower price, investor's price is reset to the new lower price (very investor-favorable; uncommon in MENA early-stage).
  • Weighted average: investor's effective price is adjusted using a formula that averages the old and new price weighted by number of shares; more balanced.
• MENA note: Anti-dilution via price-adjustment mechanisms requires amendment of constitutional documents in UAE LLC and KSA LLC structures; simpler pre-emption rights are easier to implement.

5. Dividend policy

• Minimum distribution: if distributable profits exceed [threshold], [X%] must be distributed annually (or: discretionary).
• Preferred dividends: institutional investors may require a preferred dividend (cumulative or non-cumulative) before common shareholders receive any distribution.
• Reinvestment carve-out: no dividend obligation if profits are required for agreed capex or debt service.

6. Deadlock resolution

A deadlock occurs when board or shareholder votes are tied and no resolution can be passed.

Escalation procedure:

• Step 1: refer to CEOs of each shareholder party for negotiation ([30] days).
• Step 2: refer to Chairmen / senior representatives ([30] days).
• Step 3: if still unresolved: [see below].

Resolution mechanisms:

• Independent expert: an agreed expert determines the deadlocked issue (good for business/valuation questions; not suitable for governance deadlock).
• Put/call (Texas Shootout): either party may offer to buy the other's shares at a stated price; the offeree may elect to buy the offeror's shares at that same price instead. Creates a strong incentive to price fairly.
• Russian Roulette: similar to Texas Shootout; one party names a price; the other must either buy or sell at that price.
• Windup: if deadlock continues beyond [90/180] days, any shareholder may require the company to be wound up (last resort; avoid unless deadlock is truly irresolvable).

MENA note: UAE LLC law does not specifically regulate deadlock; courts have discretion in winding-up applications. The SHA mechanism is contractual; enforcement of Texas Shootout / Russian Roulette provisions depends on UAE courts' willingness to give specific performance.

7. Exit mechanisms

IPO:

• If shareholders holding [X%] request an IPO, the company and all shareholders must use best efforts to facilitate one.
• IPO conditions: minimum revenue/EBITDA; minimum valuation; approved exchange (DFM, ADX, Tadawul, NASDAQ Dubai).
• Lock-up: post-IPO lock-up period for founders/management.

Trade sale:

• Drag-along mechanics (above) govern compulsory sale situations.
• Sale process: auction / bilateral negotiation; who runs the process; fairness opinion.

Put options (investor exit):

• Investor may put its shares back to founders/company at a formula price (cost + IRR hurdle; or FMV) after a defined period if no IPO/trade sale has occurred.
• MENA note: Put options in UAE onshore companies may face enforceability issues if framed as guaranteed returns (which may be characterized as interest / riba in a Sharia context). Structure as a market-price put or seek advice on Sharia-compliant equivalents.

Buyout at FMV:

• On any shareholder's departure (death, incapacity, breach of SHA, change of control), remaining shareholders may buy out the departing shareholder at FMV (or at a discount to FMV for cause).
• Valuation mechanism: agreed valuer; bidding procedure; expert determination.

Jurisdictional notes

UAE LLC — onshore

• Transfer restrictions (ROFR, drag-along) are enforceable as contractual rights; they can also be embedded in the MOA (notarized) for stronger enforcement via the commercial register.
• Preferred returns / IRR provisions: review against UAE interest prohibition principles; structure as profit-sharing (mudarabah / musharakah) where Sharia compliance is required.
• Company law limits: LLC shares cannot be freely transferable without compliance with Art. 79+ of Commercial Companies Law.

DIFC / ADGM

• Common-law principles; SHA provisions are freely enforceable as contracts.
• Share transfer provisions can also be embedded in the Articles of Association for additional protection.
• Anti-dilution mechanisms (weighted average, broad-based) are standard in DIFC/ADGM PE/VC structures.

KSA

• Saudi LLC (Sharikat dhat mas'ooliyyah mahdoodah): transfer restrictions enforceable by contract; amendments to articles must be notarized and registered with MISA.
• Preferred dividend structures: check Sharia compliance if any party requires Sharia-compliant investment.
• Drag-along: enforceable by contract; courts may scrutinize fairness to minority shareholders.

Key negotiation points (common battlegrounds)

Related skills

• [[prompt-pack-shareholders-agreement]]
• [[prompt-pack-share-purchase-agreement]]
• [[prompt-pack-shareholders-resolution]]
• [[prompt-pack-related-party-transaction-policy]]
• [[heuristic-always-state-jurisdiction-first]]