Shareholders' Agreements: Why Every Co-Founder Needs One

The memorandum and articles of association describe your company on paper, but they do not describe your relationship. Who can sell shares, and to whom? What happens if a founder wants to leave? How do you break a deadlock between equal partners? These questions are answered in the shareholders' agreement — the document too many Nigerian companies incorporate without.

What a Shareholders' Agreement Covers

• —Share ownership and restrictions on transfer, including rights of first refusal
• —Board composition and how directors are appointed and removed
• —Decision-making — what needs a simple majority, special majority or unanimity
• —Dividend policy and when profits are distributed
• —Deadlock resolution mechanisms
• —Exit rights — tag-along, drag-along and buy-sell provisions
• —Non-compete and confidentiality obligations of shareholders
• —Dispute resolution — often arbitration

Why Co-Founders Especially Need One

At incorporation, founders rarely discuss what happens when ambitions diverge. A 50/50 split feels fair until two founders disagree on the company's future. An agreement made while everyone is aligned — setting out what happens when they are not — is far cheaper than litigation between former partners.

Reserved Matters

The most important provision in most agreements is the list of reserved matters: decisions that no single shareholder can take alone. Typically these include selling the business, raising new equity or debt, entering major contracts, appointing or removing key management, and changing the nature of the business.

Friendship is not a governance structure. The agreement is what protects both the friendship and the business.

Protecting Investors

• —Anti-dilution protection if the company issues shares at a lower valuation
• —Information rights — regular management accounts and board access
• —Board seats and veto rights over key decisions
• —Exit rights, including tag-along on a majority sale

Deadlock Resolution

• —Mediation or negotiation escalation before any formal process
• —Buy-sell arrangements — often a sealed-bid auction between the deadlocked parties
• —A casting vote for a chairman or independent director
• —Default to arbitration where the agreement is silent

Common Mistakes

• —No agreement at all — relying on the CAC template alone
• —Vague language around valuation and share transfers
• —Failing to update the agreement after funding rounds or new hires
• —Leaving deadlock and exit unaddressed — the two most expensive omissions

Getting It Done

The best time to sign a shareholders' agreement is day one, when expectations are aligned. We draft agreements tailored to each company's ownership, industry and ambitions — and revisit them as the company grows.