A simple error in drafting could create a problem in the future.

Consider the following scenario.

A shareholders’ agreement sets out board composition and right of shareholders to nominate directors.

A shareholder who holds majority of the shares in the company would usually have the right to nominate more directors than a shareholder who holds less shares.

Say there are two shareholders in the company.

The shareholders agree that the company should have five directors, with the shareholder who holds majority of the shares having the right to appoint three directors and the other shareholder who holds less shares having the right to appoint two directors.

When drafting, if you accidentally flip the number of directors such that the agreement states that the shareholder who holds majority of the shares may appoint two directors and the other shareholder may appoint three directors, this will create unintended consequences of allowing the minority shareholder to have board control.

To err is human.

Always check your work.

It is good practice to have at least two persons reviewing draft agreement.

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This post was first posted on Linkedin on 22 June 2022.