A shareholders agreement is a legally binding contract between shareholders of a company. This contract helps establish a fair relationship between shareholders and outlines how decisions will be made and how the company will run under shareholders’ governance.
In any shareholders agreement, there must be rights and obligations to protect individual and company interests during a dispute, litigation, or warranty breaches.
This guide explores 11 things to include in a shareholders agreement and how one oversees how shares are sold, outlines regulations, and protects the interests of individual shareholders who help run a corporation.
1. The Name of the Company and All the Shareholders
As with any business contract, you should begin a shareholder agreement by stating the name of the company and each shareholder.
You should include the following information for each shareholder:
- Each’s legal first and last name
- Each’s address
- Each’s phone number
You can also use this space to identify officers of your business and appoint a managing shareholder.
Here is an article about shareholder agreements and what they involve.
2. Director Structure
Specify the board of directors and managers involved in the company's operations. Directors in an organization include:
- The Chief Executive Officer (CEO)
- The Chief Financial Officer (CFO)
- The Chief Operations Officer (COO)
The shareholder structure will vary by company. For example, small businesses and startups may only have shareholders as the board of directors.
The structure of your shareholder board will directly influence things such as:
- The day-to-day operations
- Large-scale decisions
- Individual voting rights among the shareholders
Make sure that your shareholders’ voting rights are explained regarding the percentage of the company they own.
Here is an article with more information on shareholder structure.
3. The Goals of the Agreement
The agreement's goals will likely cover many things, including voting rights, rules shareholders must follow, how decisions will be made, how the company runs, and what to do if a shareholder breaches the agreement. It should also lay the groundwork to establish a fair relationship between all parties.
Your objectives in your shareholder agreement may require addendums, such as a share repurchase agreement, shareholder loan agreement, and shares transfer agreement.
Identify the agreement's goals, then organize your contract to reflect each one accordingly.
Here is an article that provides a shareholders agreement template.
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4. How Shares Will Be Bought, Sold, or Transferred
The shareholder agreement can regulate how shareholders and the company can handle shares. This includes:
- How they can buy shares or equity
- How they can sell shares or equity
- How they can transfer shares or equity among themselves or to outside buyers
It is also important to describe how shares will be transferred or sold if a shareholder dies or divorces. For example, a provision in place may allow other shareholders to buy or inherit the previous shares before making them available to outside investors.
Here is an article about the transfer of shares.
5. Protections for Shareholders
This portion of the document allows shareholders to establish boundaries and guidelines that protect their own interests. For example, a clause may prohibit other shareholders from selling or transferring their shares without first allowing the other shareholders to purchase them for a set dollar amount.
There may also be restrictions on who can buy or inherit company shares. This can prevent losses or conflict later. For example, a family-owned business may want to prevent shareholders from selling portions of the company to third parties.
6. Dividends
Dividends are the amount of money shareholders are entitled to based on the value of their owned shares. The board of directors calculates the exact dividend amount. These are then given to shareholders on a routine basis.
Some companies do not pay dividends but instead retain earnings that they invest back into the company.
Whether or not investors receive dividends will depend on the content of the shareholders agreement. Some dividends may even be issued as shares of stock.
Here is an article with more information on dividends.
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7. Price of Shares
The shareholder agreement should clearly express the price of shares. This is often written as price-per-share.
The share price reflects the market value of each share divided by the total number of shares. So, each share price represents a fraction of the entire asset value.
This part of the agreement can also require shareholders to sell their shares for the minimum net asset value. This prevents them from selling their shares at a low rate, resulting in a loss for the company and other shareholders.
Here is an article on setting prices for shares.
8. Company Operations
The shareholders agreement can also cover factors relating to everyday operations. Most shareholders have a large say in how the company runs. To protect its interests, the company may limit shareholders' rights when it comes to influencing or directing company operations.
Shareholders’ vision for the company tends to be profit-focused and more short-term. This is important to recognize as you draw up your shareholder agreement.
You can set a certain level of commitment required from shareholders to ensure they invest more than just money into your company’s growth.
Here is an article that overviews different shareholder roles and responsibilities.
9. Restrictions and Regulations
Shareholders have certain rights by owning a portion of a company. These include:
- Voting rights
- Ownership rights
- The right to transfer and sell assets
- A right to collect dividends
- The right to sue for breach of contract or illegal activity
This provision often overviews what processes shareholders must take and what actions they do not have a right to make on behalf of the board or company.
Here is an article that looks more closely at common shareholder agreement clauses.
10. Dispute Resolution Procedures
A dispute can arise for a number of reasons among shareholders. From a direct breach of contract to disagreements over company operations, it is important to have a dispute resolution procedure in place, so you know how to manage conflict internally.
A dispute resolution agreement offers a structure on how the board of shareholders can handle disputes when they arise. Before signing, all parties must agree upon the steps and methods outlined in this agreement.
Here is an article that provides strategies for managing and resolving shareholder disputes.
11. Signature of All Parties
Finally, all parties involved must sign and date the contract to make it legally binding and enforceable.
Shareholders should sign alongside any business officers and affiliates.
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