What is a Shareholder Agreement?
A shareholder agreement is an agreement between the shareholders that governs the rights and obligations of each shareholder with respect to the company. Shareholder agreements define the relationship between shareholders and the company.
Additionally, the agreement contains information about the management of the company, as well as the privileges and protection of shareholders. It specifies the type of business activity, the number of partners, the rights of the partners, the amount of capital, the investment structure, the rights and obligations of each partner, the rights and obligations of the partners towards the company, etc.
The primary purpose of shareholder agreements is to ensure that shareholders are treated fairly and that their rights are protected. Therefore, business partners should consider creating a shareholder agreement before starting a business so that their legal rights and obligations are clear.
These important legal documents cover subjects such as who will be involved in running the company, the role of the partners, the management structure, how profits will be shared, who can sell their shares, who can transfer their shares, and how to buy out a partner who leaves the company.
The next section discusses how shareholders agreements benefit current shareholders, minority shareholders, and majority shareholders.
How does Shareholder Agreements protect Shareholders?
For Current Shareholders
In the course of the life of a company, many changes occur in the ownership of the company. Shareholder agreements protect the interests of continuing shareholders from decisions made by future management or in the event that the company is sold.
For instance, if the company is acquired by another entity, the shareholder’s agreement serves to safeguard shareholders from crucial rights, such as dividend distributions, limits on authority, restrictions on the transfer of shares, and issuance of new shares.
Therefore, the agreement serves to protect shareholders, and if a dispute arises in the future, it can serve as a reference.
For Minority Shareholders
Minority shareholders are shareholders who own shares in a company that do not represent at least 50% of the voting rights. The minority shareholders are also an essential part of the company, yet they exert very little influence over its operations.
Because the minority shareholders in a company do not have enough voting power to stop the changes or make new ones, they are often exploited by the majority shareholders.
As key decisions are often made by controlled shareholders who own more than 50% of the company, minority shareholders are usually overlooked during major decisions such as issuing new shares, taking on new debt, and appointing and removing directors.
A shareholders agreement, however, ensures that minority shareholders' rights are protected and that they are treated fairly. This limits the ability of majority shareholders to exclude minority shareholders when making important decisions.
For Majority Shareholders
The majority shareholders of any company are those who own more than 50% of the shares of the company. While a shareholder agreement can be beneficial for minority shareholders, it can also protect the majority shareholders when minority shareholders are uncooperative.
As an example, a shareholder agreement may prohibit minority shareholders from selling their shares to a competitor or another party the majority shareholders are not interested in.
What is Included in a Shareholder Agreement?
A shareholder agreement is a legal contract that defines the relationship between the shareholders and the company. Although they may differ from company to company, shareholder agreements generally include the following contents:
1. Preamble of the parties
A shareholder's agreement begins with identifying the parties whose interests are involved. In this contract, the company is one party, and its shareholders are another.
2. Board of Directors and Board meetings
The Board of Directors are entrusted to act as the fiduciary of the company, overseeing any major decisions and risks. A shareholder's agreement specifies the role of the board of directors and calls for a majority vote for decisions made by the board.
A board meeting is an opportunity for directors to gather in person to discuss matters important to the organization. It can be informal or formal depending on what's being discussed at that meeting. The agreement specifies how often the board should meet and how directors are chosen and replaced.
3. Rights of a shareholder
People who own shares of a company have certain rights granted to them. These are known as shareholder rights. Some of the most common rights of a shareholder are the right to vote, to appoint directors and auditors, to inspect financial records and statements and much more. A shareholders agreement defines these rights and responsibilities.
4. Voting rights
One of the most important aspects of a Shareholder Agreement is to outline exactly who can vote when changes occur in the operations of the company. It defines what percentage of shareholder voting rights is required to make decisions about major changes like merging with another firm or changing ownership structure between shareholders.
5. Shareholder Information and Meetings
As shareholders should be informed of the latest developments in the company, a shareholder is entitled to receive regular updates about the company through quarterly and yearly reports.
These terms are outlined in a shareholders agreement. Also, the agreement contains information about the shareholders, such as their ownership percentage in the capitalization table. In the agreement, the time, date, and place of the shareholder meetings should be stated.
6. Share Capital and Share Transfers
Share capital is the amount of money a company raises by issuing shares when it is incorporated.
In a shareholder agreement, the corporation's capital should be recorded at the time it is signed. As changing share capital is a reserved matter, the directors are not permitted to issue new shares or convert existing shares into a new class without the approval of the signatories.
A shareholder agreement also contains provisions about share transfers, including the prevention of share transfers to unwanted parties, the transfer of shares to a new owner, and what happens if a director or shareholder dies.
7. Amendment and Termination
The shareholder agreement should specify how an amendment or termination may be made.
For example, a shareholder agreement may terminate upon the dissolution of the company, based on a written agreement, or if a specific number of years has elapsed from the date of the agreement.
8. Running the Company
In any business, it is critical that policies and procedures are outlined to ensure smooth operations. A shareholders' agreement establishes how a company will operate on a day-to-day basis in order to ensure unhindered and consistent workflow.
Shareholders Agreement Template
The shareholder agreement template contains pre-filled details of the components that were discussed above. Here are some free shareholder agreement templates you can download and use right away.