Companions under control:

You know what they say - what is written is given. And in business, it's doubly true, especially when it comes to relationships between partners. You may think that you know each other, that you trust each other, and that there's no need for a contract. Wrong. Without a well-drafted Shareholders' Agreement, or SHA for short, you are exposing yourself to unnecessary risks that can jeopardize not only your business but also your personal relationships. And in 2025, the requirements for SHAs are even more stringent and complex than ever before.

Why should you pay attention? Because without clear rules, any disagreement, even the slightest, can turn into a disaster. Imagine the situation: you and your partner have been in business for five years. You're doing well, you're growing. But suddenly there's a question of what to do with the spare profits. One wants to invest in a new machine, the other to pay dividends. Who decides? What if you disagree? Without a well-set SHA, you find yourself in a stalemate that can paralyze the company and lead to financial losses or even bankruptcy. Not only can the company not grow, but it risks litigation that costs time and considerable money.

Author of the article: ARROWS (JUDr. Jakub Dohnal, Ph.D., LL.M., office@arws.cz, +420 245 007 740)

Why is SHA necessary? Prevent disasters and arguments

You may be thinking that there are statutes or a charter of incorporation. Yes, there are. But these documents only regulate the basic legal framework of the company. They do not address the specific situations that commonly arise in business, let alone the interpersonal aspects that are crucial to the functioning of the shareholders. And it is precisely these that SHA is able to cover with precision.

Imagine what can happen if the SHA is missing or inadequate:

• One of the partners wants to leave or sell his share: what happens to his share? Can he sell it to anyone, even your competitors? What will be the price if you don't agree on it? Without an SHA, you run the risk of having an unwanted shareholder in your company with whom you don't get along, or having to deal with complicated and lengthy litigation over the price of the share. This can lead to huge losses and destabilise the company.
• One of the partners gets into financial difficulties: what if a bailiff runs into his share? Or what if he decides to saddle the company with his personal debts or use his share as collateral? These situations can jeopardize the solvency of the entire company and expose you to unwanted scrutiny from outside parties.
• Disagreements over strategy or major investments: how are stalemates resolved when shareholders cannot agree on key issues such as bringing in a new investor, selling the entire company, or the direction of future development? Who has veto power, and if it is in place, how is its abuse avoided? Without clear rules, the company risks being paralysed and its growth opportunities thwarted.
• Some associates violate their duties: what if they engage in competitive activities, leak sensitive information, or even damage the firm's name? What are the penalties and how are they enforced? Without an SHA, it is difficult to sanction such conduct and protect the company's interests.

These situations are not hypothetical. Our ARROWS lawyers deal with similar issues on a daily basis. We have seen how the absence of a quality SHA can destroy even the most promising projects and relationships built over years. Not only do companies find themselves in stalemates, but personal attacks and the breakdown of long-standing friendships often occur. Prevent these disasters and ensure peace of mind and security for the future.

What must a modern SHA contain in 2025?

The business world is constantly evolving and so are the requirements for legal documents. What was valid ten years ago may no longer be sufficient today. To make sure your SHA is truly functional and protects your interests, it should include the following key elements in 2025:

1. Clear definition of the rights and obligations of the shareholders

This is the foundation on which the whole SHA is based. We need to detail what is expected of each associate and what their rights are. This includes, for example:

• Voting and decision-making rules: how are decisions on routine matters made? What about strategic decisions such as mergers, acquisitions, or entering new markets? There is a need to define quorums for voting, who has veto power, and how to deal with deadlock. For example, whether in the event of a tie, the vote of the chairman of the board is decisive, or whether a draw mechanism or escalation to a higher level is used. Specifying which issues require unanimous consent, which require a qualified majority and which require a simple majority is crucial for smooth functioning.
• Distribution of profits and losses: Clear and transparent rules for dividend payments, reinvestment of profits, provisioning and loss management. When are profits paid out? How often? And what if the company faces losses - how will shareholders deal with them? These aspects often lead to the biggest disputes.
• Powers of Managing Directors and Supervisory Boards: detailed definition of their powers, responsibilities and relationship to the SHA. Who appoints and removes members of the management? What are their responsibilities to the shareholders?
• Confidentiality: prohibition of disclosure of sensitive company information, trade secrets, client lists and strategic plans. Please also indicate any penalties for violation.
• Non-compete and conflict of interest: a key provision that prevents partners from engaging in business that could compete with your company and defines what is considered a conflict of interest and how to avoid it.

2. Mechanism for entry and exit of companions (Deadlock and Exit strategy)

This section is absolutely critical. Sooner or later, one of the partners may want to leave or a new investor may come in. Without rules in advance, this can be very painful and can bring the company down.

• Pre-emptive right: modify who has the pre-emptive right to buy a share if a shareholder wants to sell it. The procedure and time limits for exercising this right should also be defined.
• Tag-along and Drag-along clause:
• Tag-along (joint sale): protects minority shareholders. If the majority shareholder sells his share, the minority shareholders have the right to sell their shares on the same terms. This prevents the minority shareholders from finding themselves in a company with a new, potentially disadvantageous partner. This gives them the assurance that they will not be "trapped" in the company if the majority shareholder leaves.
• Drag-along (forced sale): allows majority shareholders to force minority shareholders to sell their shares if they decide to sell the entire company to an outside bidder. This is important to facilitate the sale of the company to a new investor, who usually demands a 100% stake. Without this clause, the sale could be frustrated by the opposition of one minority shareholder.
• Deadlock clause: what happens when the partners fundamentally disagree and a deadlock occurs that paralyses decision-making? The SHA must define a mechanism for resolving the dispute - for example, selling the share to one of the partners (e.g., a "Russian roulette" or "Texas shootout" clause where one party offers a price for the share and the other must either buy or sell at that price), mediation, or even arbitration. Leaving such a situation unresolved can lead to complete paralysis of the company and undo all efforts to date. ARROWS can help you set up these rules so that they are fair to all parties and minimize the risk of future disputes.

3. Share valuation mechanism

What will be the price of the share if it is sold or bought back? Without clearly defined rules, you may find yourself in an endless dispute over the value of the company. The SHA should specify:

• Valuation method: whether, for example, discounted cash flow (DCF), EBITDA multiple, asset valuation, or other method is used. Relevant data for the valuation (e.g. latest audited financial statements) should also be clearly defined.
• The independent expert: who will select him, how his selection will be approved and who will bear the cost of his valuation. A list of preferred valuation companies can also be defined.

4. Rules for financing and development of the company

How will the company be financed in the future? Who will inject additional capital if needed?

• Rules for capital injections: who can request further investment from shareholders and under what conditions, and what happens if a shareholder fails to contribute (e.g. dilution of his/her share, loss of voting rights).
• Deciding on loans and debt: who decides on taking loans, issuing bonds and what is the maximum level of debt the company can reach without the consent of all shareholders.
• Dividends vs. reinvestment: specific rules for deciding whether profits are paid out as dividends or reinvested in the company for its further development.

5. Dispute resolution clause

Despite the best intentions, disputes can arise. The key is to have a mechanism to resolve them effectively without causing damage to the company or endless legal wrangling.

• Dispute escalation: a hierarchy of dispute resolution - for example, first negotiations between the partners, then mediation, and only then arbitration or court.
• Mediation: it is assumed that an attempt is made to resolve the dispute amicably with the help of an independent mediator. This is often the quickest and least expensive way.
• Arbitration: instead of lengthy litigation, the dispute is settled before an independent arbitrator (or panel of arbitrators), which is usually faster, more discreet and more professional for business disputes.

6. Modification of sensitive topics

In 2025, it is increasingly important to remember other, often overlooked but crucial aspects that affect the value and stability of society.

• Intellectual property (IP): clearly define who owns the intellectual property (patents, trademarks, copyrights, know-how) created within the company and how it is handled in the event of a shareholder's departure. This will prevent disputes over who has rights to key products or services of the company.
• Cybersecurity and Data Protection (GDPR): due to the increasing importance of data and strict regulations (e.g. GDPR), it is important that SHA refer to for company policies in this area and define associates' responsibilities for compliance.
• Code of Conduct and ESG (Environmental, Social, Governance): more and more companies are placing emphasis on social responsibility and sustainability. An SHA can include a commitment by shareholders to ethical and ESG principles, which increases the attractiveness of the company to investors and partners.
• Death, disability or incapacity of a partner: what happens if one of the partners dies, becomes disabled or incapacitated? What is the treatment of his/her share? Does it pass to the heirs or do the other partners have the right to buy it? Defining such situations avoids complex legal disputes with heirs or family members.

Have your SHA customized: generic designs are not enough!

Imagine you are building a house. Would you use a generic plan downloaded from the internet without taking into account the specifics of your plot, your needs and your plans for the future? Probably not. It's the same with SHA. Each business is unique, as are the relationships between its associates. Generic templates from the internet, while tempting, usually don't address your company's specific needs and may cost you far more in the future than you save on legal services.

We see it all the time. Clients come in with problems that could have been solved at the beginning if they had a well-written SHA. Instead, they're faced with:

• Protracted and expensive litigation: because they did not have clearly defined rules for resolving disputes, leading to escalation and huge costs.
• Stalemates: when they cannot agree on key decisions and the company cannot grow, resulting in loss of market share and thwarted investments.
• Loss of control of the company: when an unwanted shareholder gets into the company, or when they fail to defend themselves against unfair competition or share manipulation.
• Endangering family relationships: if you run a business with family and don't have clear rules, the business can become a battleground that will destroy even personal ties and leave bitterness for years.
• Threatening company value: companies without clear internal rules are less attractive to investors, which can reduce their market value and limit access to external financing.

Writing an SHA is an investment in the future of your business. It's an insurance policy that will save you worry, money, and most importantly, peace of mind. What's more, a well-written SHA can be attractive to potential investors. They can see that you have your company in order, that you are professional, and that you have thought of all possible scenarios. This gives them confidence and increases trust in your business.

Don't miss key aspects: what you should keep in mind

When creating an SHA, it is important to think about other, often overlooked, aspects that can have a major impact on the functioning of your company and its long-term stability.

• SHA change rules: how will the contract change in the future? Will the consent of all partners or a qualified majority be required? It's good to keep in mind that conditions in business can change quickly, and the agreement should be flexible enough to adapt to new circumstances without undue complications.
• SHA binding on future shareholders: what happens when a new shareholder joins the company - either by the sale of a share by an existing shareholder or by a new investment? Will the SHA be automatically binding on him or does he have to accede to it? This is key to maintaining stability and predictability in the management of the company. Pre-defined mechanisms for new shareholders to join the SHA guarantee continuity.
• Choice of law and place of dispute resolution (for the international dimension): if your company or its shareholders have an international dimension, it is absolutely necessary to define which law will be used for the interpretation of the SHA and where any disputes will be resolved (e.g. courts in the Czech Republic or an international arbitration centre in London or Vienna). A wrong choice can lead to huge complications and unrecognisable decisions.
• Communication and reporting: the SHA may include rules on regular communication between the shareholders, reporting on the financial position of the company and access to information. This increases transparency and reduces the scope for misunderstanding.
• Liability for violation of the SHA: Detailed description of penalties and compensation for violation of individual provisions of the SHA. This may include contractual penalties, the right to buy out the share of the guilty party, or restrictions on voting rights.

All these details are routine for us at ARROWS. We are used to thinking ahead and preparing you for all possibilities. Our attorneys know how to word provisions so that they are legally enforceable, understandable to all parties, and minimize future risks and disputes. Your peace of mind is our priority.

Your investment in peace of mind and security

Writing a quality SHA is an investment that will pay you back many times over. Not only will it give you peace of mind, but it will also strengthen your position in the market and increase the value of your company. Prospective investors and partners will appreciate that you have an orderly company, that you are professional and that you are prepared for any situation. Trust and transparency are key in modern business, and a well-crafted SHA is a clear signal of your professionalism.

Don't wait until there's a problem. Don't wait for disagreements between partners to escalate to a stage where resolution is extremely expensive and time-consuming. The earlier you focus on writing an SHA, the less risk you take and the better you can protect your business and your assets. Remember, a well-written SHA is like a good map - it shows you the way, prepares you for obstacles and helps you reach your destination safely.

Do you have any questions? Wondering if your current SHA is sufficient for the challenges of 2025? Or do you not have one at all and feel uncertain? Don't put it off. Contact us at ARROWS. We will be happy to discuss your situation with you and propose an optimal solution. Our lawyers are ready to help you ensure that your business thrives and your relationships with your stakeholders remain strong and trustworthy. We are here to help you run your business smoothly and safely.

Who can you turn to?

How to start preparing SHA?

It's easier than you think. The first step is the most important one - realising the need and taking action.

1. Internal brainstorming and analysis of the current situation: if you already have some agreements, go through them and identify weak points. If not, think about the key areas you would like to adjust - who has what role, how are profits shared, what if someone decides to leave? Write these points down.
2. Initial consultation with an expert: Book an initial consultation with our ARROWS lawyers. This initial meeting is crucial to understanding your specific needs and goals. Together we will discuss your vision, risks and outline the ideal SHA structure for your business.
3. Proposal preparation and negotiation: we will prepare a comprehensive SHA proposal for you, based on the consultation, that takes into account all relevant aspects and is legally enforceable. This is followed by a negotiation phase with the other partners, where we will help you to make the agreement smooth and constructive, so that it is acceptable to all.
4. Signature and implementation: once agreement is reached and final approval is given, the SHA will be signed. We will help you implement it correctly into your company structure and ensure that all shareholders understand its provisions.

Remember: investing in legal services when creating an SHA is an investment in the security, stability and long-term success of your business. Don't miss the train and be prepared for whatever the business brings. With a well-written SHA in hand, you will have real control over your business and minimize the risk of future litigation.

Do you need to get a handle on what a quality Shareholder Rights and Obligations Agreement (SHA) should look like in 2025? Are you dealing with disagreements between partners, the entry of a new investor or the sale of a share and don't have clear rules? At ARROWS Law Firm, we specialize in corporate law and drafting comprehensive SHAs. We help companies set clear rules, avoid disputes and ensure peace of mind for future development. Contact us - we're ready to help.

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