Shareholders Agreement (1)

A shareholders’ agreement mainly defines the rights and obligations of the main investors, the issuing company, and the founding shareholders after the investment is made. It mainly stipulates the arrangements regarding corporate management, information disclosure, and Business Exit Strategy.

Contracting Parties: Principle Preferred Shareholders, issuing company, and founding shareholders

* In most Japanese companies, the founding shareholder is elected as executive directors and have majorities of voting ration. So, they have executive authorities over how the investment funds are to be managed. Therefore, in many cases, the founding shareholders are included as parties to each agreement listed above. In other words, it is not necessary to have the founding shareholders, who have less effective control, participate as parties to the agreement.

In addition, many individual investors (or “Angels”) and employee shareholders have no interest in or knowledge of the company’s management; so it is advisable to exclude such shareholders from the contract. However, since such minority shareholders may also have an interest in a Business Exit of a company, it may be necessary to conclude a Residual Distribution Agreement separately.

In the agreement, “Principle Preferred Shareholders” may be defined in the periodic clause as “Class X Preferred Shareholders holding 2/3 or more of the issued Class X Preferred Shares,” etc. In most agreement, the approval of such investors is often deemed to constitute the approval of all investors.

Obligation of Prior Notice and Prior Approval

Even principle preferred shareholders do not want to monitor or make decisions regarding all aspects of the management of the companies in which they invest. On the other hand, they may want to know in advance about some important matters, such as the sale of a business or the election or dismissal of directors.

Some of such decisions require a resolution at a general shareholders’ meeting, but since a general shareholders’ meeting is a costly and labor-intensive event, a company often gives some prior notice and gain prior approval from shareholders avoiding the risk of suddenly making such proposal and denied by the shareholders at the meeting.

Prior notice:

Notifying principle preferred shareholders of certain decisions prior to submitting proposals to the general shareholders’ meeting or board of directors meeting (prior approval is not required). In some cases, it may be stipulated that prior consultation shall be held after notifications.

Prior approval:

Notifying principle preferred shareholders of certain decisions and obtaining their approval prior to submitting a proposal to a general meeting of shareholders or a meeting of the board of directors.

Method of prior notice/approval:

In order to reduce administrative burdens, most notifications are sent by e-mail, etc.

Duration of notification/response:

The deadline for notification is specified in the contract as “XX days before the decision is made”. As for the deadline for shareholders to respond, it is usually stipulated that “shareholders who do not notify whether they approve or disapprve after XX days from the receipt of notification are deemed to have approved.”

Examples matters of prior notice/approval:

The contents of the notifying matters stipulated in the agreement may gradually differ as the rounds financing are repeated, but it would be far easier for the company to reduce the administrative burden if these contents were uniformly stipulated for all shareholders (i.e., it is very difficult to know and manage individually which shareholders need to be notified of what and how many days in advance). Therefore, if such a situation arises, it may be necessary to consider discussing a partial amendment of the agreement between the parties.
For the reason, it is not recommended to change the contents of the notice and approval items as directed by the new shareholders.

Changes to the Articles of Incorporation
Issuance or disposition of shares or other securities of the issuer. (Normally, exception clause is stipulated as “except for the issuance of stock options not exceeding X% of the total number of shares issued and outstanding.”)
Merger, share exchange, share transfer, company split, business transfer, or business acquisition
Approval for the transfer of shares of the issuing company;
Decisions on dissolution, bankruptcy, civil rehabilitation, corporate reorganization, or special liquidation
Assignment, pledge or other disposition of shares of the issuer held by the founding shareholders
Change in the use of funds
Appointment or dismissal of directors or officers, or conclusion, modification or termination of investment contracts
Decisions on or changes to the scheduled time, market, lead managing underwriter, audit firm of IPO.

Disclosure of Information

The disclosure information clause stipulates the company’s obligation to disclose information that is important for management from time to time, such as the articles of incorporation, shareholders list, business plan, and monthly trial balance.

Method of disclosure:

Generally, electronic disclosure by e-mail (PDF) or other means.

Duration of disclosure:

Consideration should be given to the extent that it is not too burdensome for the company, and a certain amount of period of preparation should be allowed for each item of information to be disclosed.
e.g.) Financial statements for each fiscal year shall be disclosed within 30 days after the end of the fiscal year.