A Shareholder Agreement is a contract between shareholders of a corporation. It specifies shareholder rights and responsibilities and includes terms on internal management, share valuation, profit distribution, dispute resolution methods, and more within a corporation. A shareholders’ agreement makes sure that the relationship between the shareholders and the directors of a company is set and agreed upon. In any business, this is a very important document because it gives a good idea of how a company will be run.
While each shareholders agreement is different, there are a few provisions that every shareholders agreement should have.
You need to make sure that your shareholders’ agreement says how many directors can be on the board and how many shares are needed to make a director happen. It should also say how and when a director can be removed, what their provisions are, how meetings are called, and how they vote (e.g., will each director have one vote, or will they have as many votes as the shareholder who appointed them?)
If the company has shares that aren’t ordinary shares, the agreement should spell out how many shares each shareholder owns, what rights each share class has, how many votes each shareholder has, and what specific rights or restrictions each shareholder might have (such as call options, vesting of shares, or restraints of trade).
In most cases, the agreement will stipulate that any new shares are first given to existing shareholders on a pro-rata basis. This is known as the “pre-emptive rights” of shareholders, and business owners should be aware of this right as well.
How a shareholder can sell his or her shares should be spelled out in the shareholders’ agreement (how they exit). When it comes to the process, notices, and timelines as well as the valuation of the property, these should be in very clear terms. The valuation of shares is very important and should be carefully thought about.
5. Deadlock and disagreements
Disputes happen, and there will always be the possibility of different views. Shareholders who own a company can’t agree on how it should be run, so a deadlock provision is used to get them to agree. The agreement should be very clear about how to solve problems and what actions will be taken.
A well-thought-out shareholders’ agreement will not only protect the interests of the majority, but also those of the minority. The goal is to come up with an agreement that builds trust and creates value for everyone. There is a lot of talk about terms like “unanimous shareholder approval” or “the approval of a specific minority shareholder” being required for certain company decisions.
You might also want to think about including provisions about how much money can be raised so that existing shareholders don’t get diluted. This is especially true if you invested a lot of money.
Your Memorandum of Incorporation (MOI) is the most important of the two documents you need to keep in mind. However the MOI is public and, if there are things that the shareholders want to keep private, they should be included in the shareholders’ agreement. Make sure you know that if there is anything in the shareholders’ agreement that doesn’t agree with the MOI, it will not be valid. As a result, it is important that both documents be written in unison with a high degree of engagement and alignment.
When you write an agreement, you should think about the culture and goals of your business, as well as the terms that are important to you. People who want to write a shareholders agreement for their company or who want to review an existing shareholders agreement should get help from a lawyer to make sure the agreement is in line with their business goals and that they understand the consequences of the provisions in it.