Understanding Shareholder Agreements

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Shareholder Agreements: Key Elements You Need To Know

A shareholders’ agreement is a legal document outlining the rights and obligations of the various stakeholders within a company. When a shareholders’ agreement is not properly drafted, it can cause disputes between stakeholders and cause you to lose some or all of your share in the business. For such an agreement to offer the protection you need, it must contain the following key elements.

Legal Obligations

Right from the start, a shareholder agreement needs to outline the legal obligations of each party to the contract. This should be as in-depth as possible. If the roles and responsibilities are not made clear, it is likely that there will be a dispute somewhere down the line, and such a dispute could cost your company in terms of revenue and reputation.

Sale of Shares

When a stakeholder wants to sell their shares in the company, it can cause complications. Your shareholder agreement should outline what procedures of sale are acceptable and detail the steps that must be taken. You also want to note what the solution would be should all stakeholders be in disagreement with each other and wish to sell their shares.

Role of Stakeholders in Company Operations

This clause should outline any and all roles stakeholders will have in company operations. This section of the agreement should be lengthy and cover everything from day-to-day responsibilities to who has the right to appoint someone to the board of the company.

Veto Rights

One of the most critical elements to include is how veto rights work. This section should clarify which transactions at the company cannot be completed until after there is shareholder consent. The rights of minority shareholders must also be considered, not just those in the majority.

Non-Compete Clause

When someone becomes a shareholder in your company, you want to ensure they aren’t going to also be your competition. A non-compete clause prevents a stakeholder from entering into direct competition with your business, soliciting your supplies, or luring away your staff. The language here must be clear, otherwise it is easy to find a loophole.

Ending the Contract

It should always be assumed that any business relationship will eventually come to an end. Your shareholder agreement needs to specify what the path to an exit is. Not only should this note what documents need to be filed and the steps to take, but also what happens to the money involved and how other shareholders will be protected from damage.

Other Items to Include

The following are clauses that could be helpful in strengthening your shareholder agreement.

  • Confidentiality
  • Arbitration
  • No partnership
  • Conflict with company interests

Keep in mind that what your shareholder agreement needs may not be the same as what other companies require. While there are numerous templates available online, these are not tailored to the needs and interests of your business. It is best to work with a knowledgeable contract attorney near you, as a poorly drafted agreement will certainly cost you more than the fees a lawyer will charge to create one for you.

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