A shareholder agreement (or a stockholders’ agreement) is a formal contract that sets out and explains the structure and nature of the shareholders’ relationship with the corporation and one another. Corporations find this type of agreement highly valuable because it helps create a strong foundation for the corporation.
This agreement will govern the interactions between the company’s owners and directors, so it needs to be strong, thorough, and well-thought-out. It’s also important to spend time on this document because it protects shareholders’ rights, prevents disputes, and regulates the transfer of shares.
Who Is a Shareholder
A shareholder is any individual, institution, or company that owns at least one share of stock in a business. If the business does well, the individual or entity with stock ownership experiences financial gain. Their partial ownership of the business may give them some control over the company’s operations.
What Does a Shareholder Agreement Cover?
Here are some of the elements that are part of a shareholders’ agreement:
Management and Control
Shareholder agreements cover the scope of responsibilities the following parties will have:
- The board of directors
- President
- Vice president
- Treasurer
- Secretary
- Other officers, as necessary
Employment of Shareholders
This agreement may discuss whether a company’s shareholders are allowed to have employment as officers. It may establish certain limitations, like a requirement for the shareholders to be active in the business. This clarification can prevent disputes that may otherwise arise regarding shareholders’ pay rates or workloads.
Non-Competition and Trade Secrets Clauses
It may cover non-competition and trade secrets clauses to protect the interests and the competitive advantages of the company.
Distributions of Income and Losses
Shareholders can refer to their agreement for guidelines on determining net income and loss. They can also see instructions for retaining and distributing net income for the business.
Shareholder Loans to the Corporation
Sometimes, a company may benefit from a shareholder loan to expand its operations or improve existing business processes. A shareholder agreement outlines the terms and conditions under which a shareholder can loan money to a company.
Dissolution of the Corporation
While many businesses intend to exist long-term, circumstances may cause a corporation to dissolve. This document covers the conditions under which the corporation can dissolve, including the specific procedures shareholders must follow and the resulting distribution of assets.
Transfer of Shares
This document regulates shares acquired for investment purposes, restrictions on transfers, and buy-sell agreements.
Dispute Resolution
Shareholders may disagree on some issues as the business continues its operations. A pre-established agreement can guide simple resolutions that benefit the company and the disputing parties’ interests.
Optional Clauses
Some optional clauses that can cover shareholders’ rights include:
- Tag-along clause: This clause helps protect minority shareholders by allowing a minority shareholder to sell their shares under the same circumstances as the majority shareholder.
- Shotgun clause: This clause can settle shareholder disputes, as it allows a shareholder to propose the purchase of another shareholder’s stocks at fair market value.
- Right of first refusal clause: This clause grants current shareholders primary access to purchase shares when a selling shareholder is trying to get rid of their stocks.
If you’re engaging in the sale and purchase of shares as a shareholder, you may need a stock certificate to prove you own your shares.
What Happens If There’s No Shareholders’ Agreement?
Even though this document is not required, there can be severe consequences for not having one available and in use:
- Potential investors may hesitate to invest in a company without an existing shareholders’ agreement.
- Future disputes may be harder to resolve.
- You may lose the chance to stabilize a business in its infancy.
How to Write
Step 1 – List the Company Information
List the company information, including the name and operating location. You can also list the date you’re drafting the agreement.
Step 2 – Name the Shareholders
Name all the shareholders and indicate how many shares each has in the company.
Step 3 – Designate the Duties of the Board of Directors
Designate the duties of the board of directors. The board of directors will be able to perform specific acts on the corporation’s behalf, and each shareholder will have the right to sit on the company’s board.
Step 4 – Highlight Any Limitations
Emphasize any limitations the board has. For example, you may not want the board to be able to voluntarily dissolve the company or issue additional shares without all the shareholders’ consent.
Step 5 – Specify Distributions
Specify whether distributions will be annually, quarterly, monthly, or at a more frequent interval.
Step 6 – Clarify Shareholders’ Right of First Refusal
If a shareholder wants to sell their shares, they must offer them at a fair price to other shareholders first. Designate the number of days the other shareholders will have to exercise their right of first refusal.
Step 7 – Determine the Agreement’s Termination
Specify cases in which the agreement will terminate. For example, you can record that this agreement will terminate if you have the written consent of all shareholders or all the shareholders pass away or become incapacitated.
Step 8 – Declare What State Will Govern the Agreement
Declare what state will govern the agreement in case disputes arise that require litigation.
Step 9 – Determine How to Resolve Disputes
Determine how disputes will be resolved, whether through litigation, arbitration, mediation, or mediation with binding arbitration.
Step 10 – Obtain the Shareholders’ Signatures
Review this agreement with all the shareholders and have them sign it to put the document into effect.
