A shareholder agreement is the legal document governing relationships between investors in an SPV. It defines rights, obligations, and mechanisms for key decisions.
Purpose of Shareholder Agreements
Define Rights
- Ownership percentages
- Voting rights
- Information access
- Distribution entitlements
Establish Governance
- Decision-making processes
- Management authority
- Reporting requirements
- Meeting procedures
Protect Interests
- Minority protections
- Exit mechanisms
- Dispute resolution
- Transfer restrictions
Key Provisions
Ownership and Shares
- Share classes
- Ownership percentages
- Capital contributions
- Additional funding
Profit Distribution
- Distribution timing
- Calculation methodology
- Waterfall structure
- Reserve requirements
Governance
- Board composition
- Voting thresholds
- Reserved matters
- Management authority
Exit Mechanisms
- Sale process
- Drag-along rights
- Tag-along rights
- Buy-back provisions
Distribution Waterfall
Typical Structure
- Return of capital
- Preferred return (if applicable)
- Profit split
Example
- Total proceeds: $1,200,000
- Investor capital: $1,000,000
- First: Return $1,000,000 to investors
- Remaining: $200,000 profit split per agreement
Voting Rights
Ordinary Matters
- Simple majority
- Routine decisions
- Operational issues
Reserved Matters
- Supermajority or unanimous
- Major decisions
- Sale of property
- Additional borrowing
Investor Protections
Information Rights
- Regular reporting
- Financial statements
- Project updates
- Access to records
Anti-Dilution
- Protection against dilution
- Pre-emptive rights
- Fair treatment
Exit Rights
- Defined exit process
- Fair valuation
- Liquidity mechanisms
Transfer Restrictions
Typical Provisions
- Board approval required
- Right of first refusal
- Permitted transferees
- Lock-up periods
Purpose
- Maintain investor quality
- Prevent unwanted transfers
- Protect other investors
Dispute Resolution
Mechanisms
- Negotiation first
- Mediation
- Arbitration
- Court proceedings
Jurisdiction
- Specified in agreement
- Often DIFC for Dubai investments
- Clear process defined
Due Diligence Checklist
Before investing, review:
- ☐ Distribution waterfall
- ☐ Voting rights
- ☐ Exit mechanisms
- ☐ Information rights
- ☐ Transfer restrictions
- ☐ Dispute resolution
- ☐ Management authority
- ☐ Reserved matters
Red Flags
Watch for:
- Unclear distribution terms
- Excessive management control
- Limited information rights
- No exit mechanism
- Unfair transfer restrictions
Conclusion
Shareholder agreements:
- Define investor rights
- Establish governance
- Protect interests
- Enable exits
Always review and understand shareholder agreement terms before investing.
