Stock acquisition and shareholder agreements, how should they be written? (Form provided)

Law firm Veat received a request from pet startup A (hereinafter referred to as “the client”) to draft a stock transfer agreement.

​The pet market has been growing rapidly recently, and related startups are also developing rapidly. However, if legal issues such as stock transfers and shareholder agreements are not clearly resolved during the growth process of a startup, it may experience difficulties in operating the business in the future.

​Law firm Veat provided legal advice to the client during the process of concluding a stock transfer agreement and shareholder agreement between the representative director and employees, and between the representative director and a third party, and drafted a contract reflecting the agreed-upon key rights and obligations.

Stock transfers may occur between the representative director and employees, or between the representative director and a third party during the growth process of a startup. These stock transfers are not simply stock sales, but also closely related to corporate governance and management rights. Therefore, a clear agreement is essential.

​Law firm Veat drafted customized stock transfer agreements, considering the characteristics of each transaction and the status of the parties, to minimize legal risks during the client’s stock transfer process. In particular, it analyzed the impact of changes in the equity ratio on the company’s management rights and decision-making structure, designing it to ensure that the company can operate stably.

Things to consider in a shareholder agreement

Even after the stock transfer transaction is completed, if the relationship between shareholders is not clearly clarified, unexpected disputes may arise in the future. It is important to conclude a shareholder agreement to prevent this.

​Law firm Veat focused on the following aspects, such as restrictions on transfer of equity, non-compete, obligation to serve, obligation to achieve performance, and obligation to recover in the event of a major breach of obligation, to clearly define the rights and obligations of each shareholder for the stability of the company’s management, to conclude a shareholder agreement for the client.

* Restrictions on transfer of equity

​If a major shareholder of a startup freely transfers their holdings to external investors or a third party, unexpected changes in the governance structure may occur. Therefore, it is possible to prevent unnecessary management disputes by including a provision restricting the transfer of equity without the consent of the shareholders.

* Non-compete clause

​If a startup’s founder or major shareholder leaves the company and starts a similar business or joins a competitor, there is a risk that the company’s trade secrets or core technology will be leaked. Therefore, the shareholder agreement includes a non-compete clause that prohibits working for a competing company or starting a similar business for a certain period of time. Particularly in the startup industry recently, there has been controversy over the validity and scope of non-compete clauses after the departure of key personnel. The company should discuss with experts to draft it carefully, ensuring that the non-compete clause does not constitute an excessive restriction while protecting core technology and trade secrets.

* Obligation to serve and obligation to achieve performance

In a startup, the role of founding members and key employees is very important. Therefore, the agreement includes an “obligation to serve” provision imposing an obligation to work for the company for a certain period of time. In addition, if certain performance must be achieved, an “obligation to achieve performance” provision is also added to design the company to achieve continued growth.

* Recovery clause in the event of a major breach of obligation

For a startup to grow stably, trust between shareholders is most important. However, if a particular shareholder breaches a contractual obligation, it may adversely affect the company’s growth. Therefore, including a clause that allows for the recovery of the shareholder’s equity in the event of a breach of a major obligation helps the company to continue its long-term management based on trust.

When concluding a stock transfer and shareholder agreement, it is essential not only to draft a contract but also to draft a customized contract that fits the specific situation of each company. Law firm Veat has systematically organized each provision and provided legal protection by considering the company’s structure and the role of the shareholders, and drafting a contract.

Safe stock transfer and shareholder agreement with Law firm Veat

For a startup, trust between founding members is important, so it is essential to define clear rights and obligations through a shareholder agreement. This can prevent unnecessary disputes and establish a foundation for the company to grow continuously.

If legal review is inadequate during this process, there is a high probability of future disputes or management right issues. Law firm Veat aims to provide legal advice that prevents unnecessary disputes and allows the company to grow continuously, based on its expertise specializing in IT and startup fields, and by understanding detailed information such as the company’s conditions and requirements.

Law firm Veat provides regular legal advisory services, categorized into stages where regular business is expected and stages where it is expected to occur intermittently, considering the characteristics of startups. You can receive legal advice necessary in the initial stage through consultation with a startup-specialized lawyer.

Law firm Veat also [provides legal materials] to support startup operations. It aims to provide practical legal advice by providing free templates for various contracts, such as stock transfer agreements, shareholder agreements, employment contracts, confidentiality agreements, new stock subscription agreements, and stock option agreements.

This case study can also be checked on the Law firm Veat blog below.

- How to draft a stock transfer and shareholder agreement? (Template provided)

Thank you.

Law firm Veat