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What is a Shareholders’ Agreement?
A shareholders’ agreement is a legally binding contract that outlines the regulations used to run a corporation. This agreement, also called a stockholders’ agreement or SHA, is used to protect the interests of each individual shareholder and establish a fair relationship within the company.
A shareholder agreement will include the rights and obligations of each shareholder, how the shares of the company are sold, how the company will run, and how decisions will be made.
To further understand what a shareholders’ agreement is, read this.
Who Needs a Shareholders’ Agreement?
When a corporation is created and more than one person will be investing money into the company, a shareholders’ agreement is essential. This document should be drafted and signed right when a corporation is formed to avoid any issues or confusion when setting up the company.
A shareholders’ agreement should be used whether a corporation has a lot of investors or just a couple. It should also be used even if the investors are family or close friends.
It can be easy to assume that if you go into business with people you know, you will not have disputes or issues. Even though this may be true, a shareholders’ agreement will protect everyone’s rights and interests and you will always have a clear, fair way to settle a dispute should one arise.
Even if a corporation has articles of incorporation that outline the company’s laws and policies, it is still a good idea to also draft a shareholders’ agreement for extra clarity and protection.
For more information on shareholders’ agreements for small businesses, read this article.
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Important Clauses Found in Shareholders’ Agreements
Every shareholders’ agreement should be clear and detailed. Although each agreement will be custom tailored to each individual business, all agreements need to include key components. These components describe how the business will be run, how to resolve issues between shareholders and what each shareholder’s responsibilities and benefits are.
Shareholders’ agreements usually contain the following key provisions:
- A preamble that lists the parties including the company name and all shareholders to be included in the agreement
- The goals of the agreement
- How shares will be bought, sold, or transferred (this includes both the optional and mandatory buying-back of shares by the company and what happens in the event of the death of a shareholder)
- Protections for holders of less than 50% of shares
- Dividends
- A right of first refusal clause
- Fair price for shares
- How the company will be run including information about appointing or removing directors, board meetings, management information, banking arrangements and other important financial details
- Dispute resolution procedures
In addition to these provisions, a shareholders’ agreement should also contain the date, the number of shares issued, the percentage ownership of each shareholder, how votes are decided and how shares are created.
Other important clauses that can usually be found in a shareholders’ agreement include the following:
Clause 1: Director Structure
This clause will regulate the directors of a company. It will detail decision making policies, rights of shareholders to appoint or remove directors, and the powers of directors.
Clause 2: Buying and Selling Provisions
These are the rights and obligations of shareholders to buy or sell their shares. Some instances where shares may need to be bought or sold include insolvency, disability, death, or retirement. This is one of the most important parts of a shareholders’ agreement and should include a way to value shares.
Clause 3: Financing
This clause will include how shareholders contribute capital in the company and what happens if a shareholder can no longer contribute.
Example of Initial Funding Clause in Shareholders' Agreement
Initial contributions. Until the Initial Evaluation Date, each Shareholder shall be required (in accordance with any Contribution Notice which is served on it) to make capital contributions for the purposes and in the amounts specified in the existing Business Plan not exceeding, in aggregate, the value of the Initial Contribution Cap.
Reference :
Security Exchange Commission - Edgar Database, EX-10.2 3 dex102.htm SHAREHOLDERS AGREEMENT , Viewed May 20, 2021, < SEC Link >.
Clause 4: Restrictions on the Transfer of Shares
Restrictions on share transfers allows each shareholder to have some control over who they are doing business with. It is common to first require a director’s approval to transfer shares or to offer first rights to buy shares to existing shareholders.
Example of Restrictions on the Transfer of Shares Clause in Shareholders' Agreement
RESTRICTIONS ON DEALING WITH SHARES
(A) Transfer by a Shareholder of the legal and beneficial title to any Share, Convertible Share or Preference Share is only permitted in accordance with the provisions of clause 12 (Funding and performance tests), clause 17 (Voluntary transfers) or clause 18 (Transfer of Shares on default), or with the prior written consent of the other Shareholder.
(B) Notwithstanding the provisions set out above, no transfer of any Share shall be registered unless and until the transferor complies with the provisions of clause 9.5(D)(ii) (Directors’ interests and fiduciary duties).
(C) Save as set out above at clause 16(A) , no Disposal of any Share, Convertible Share or Preference Share or any legal or beneficial interest in any such share is permitted and the transfer of any Share, Convertible Share or Preference Share (other than in strict accordance with this agreement) shall not be registered.
Reference :
Security Exchange Commission - Edgar Database, EX-10.2 3 dex102.htm SHAREHOLDERS AGREEMENT , Viewed May 20, 2021, < SEC Link >.
Clause 5: Dispute Resolution
Dispute resolution is an important clause in a shareholders’ agreement. This lays out how to resolve any conflicts between shareholders as well as consequences for breaches of the agreement.
Clause 6: Confidentiality
Unless otherwise agreed upon, the terms of the shareholders’ agreement are normally confidential to the parties in the agreement.
Here is an article with samples on the Confidentiality Clause .
Clause 7: Shareholder and Director Meetings
Most corporations have scheduled meetings for their shareholders and directors. Laying out the meeting schedule within the agreement can be helpful for structure avoiding confusion in the future. This clause should also contain how meetings will be held with what procedures will be in place and voting procedures.
Clause 8: Protections for the Company
The shareholders’ agreement does not only serve to protect shareholders, but also the company. This clause will lay out rules to protect the company that could include limiting shareholders from being involved with competition or restrictions on shareholder’s interaction with customers.
Every shareholder agreement will be different based upon the needs and structure of the company. The most important thing to remember though is to make sure the agreement is as detailed and easy to understand as possible.
Click here to visit ContractsCounsel’s Contract Clauses Guide .
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Are Shareholder’s Agreements Legally Binding?
Yes. A shareholders’ agreement, once signed, is a legally binding contract. Legally binding contracts require four elements: offer, acceptance, consideration, and the understanding that a contract is being formed.
In the scenario of a shareholders’ agreement, consideration is essential. Generally, consideration is met by the shareholder purchasing company shares. As long as there is an exchange of value, the element of consideration has been fulfilled.
How Do I Write a Shareholders’ Agreement?
If you are starting a corporation and are in need of a shareholder agreement, it is generally a good idea to consult with a corporate lawyer who specializes in these types of contracts .
If you are considering drafting your own shareholders agreement, consider these questions:
Question 1 : What issues will the agreement cover?
Question 2 : What are the interests of the shareholders?
Question 3 : What is the value of each shareholder?
Question 4 : Who will be making decisions for the company?
Question 5 : How will shareholders vote and how much will each vote weigh?
You will need to be sure that each shareholder is correctly named with their address and phone number. You should also include any officers of the company and who is going to be a managing shareholder.
Shareholder responsibilities, voting rights, and decision-making capabilities should be clearly and explicitly outlined in the agreement.
It is important to remember that unlike articles of incorporation which can be changed with a majority vote, a shareholders’ agreement requires all shareholders to agree to make any changes. It is crucial that this agreement is complete, all encompassing, and says exactly what you need it to say before being executed.
To look over an example of a shareholders’ agreement, click here.
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Meet some of our Shareholders Agreement Lawyers
Ramanathan C.
Dual Qualified New York Attorney & Enrolled NZ Barrister & Solicitor
November 8, 2021
Jessica P.
Ms. Penovich partners with clients to overcome complex challenges and find innovative solutions. Ms. Penovich has served as General Counsel at J.W. Cole and an Adjunct Professor of Estate Planning at the MUMA College of Business at the University of South Florida. She is a member of the Florida Bar, and has over 15 years of progressive financial services experience developed at top-tier financial firms including Transamerica, Raymond James, and Citi.
November 9, 2021
Josiah Y.
Attorney licensed to practice in both California and New York, Josiah is focused on helping people understand what's in their contracts, and do business with confidence.
November 12, 2021
Natalie A.
I am an experienced in house counsel and have worked in the pharmaceutical, consumer goods and restaurant industry. I have experience with a variety of agreements, below is a non-exhaustive list of types of agreements I can help with: Supply Agreements Distribution Agreements Manufacture Agreements Service Agreements Employment Agreements Consulting Agreements Commercial and residential lease agreements Non-compete Agreements Confidentiality and Non-Disclosure Agreements Demand Letters Termination notice Notice of breach of contract My experience as in house counsel has exposed me to a wide variety of commercial matters for which I can provide consulting and assistance on. I have advised US, Canadian and International entities on cross-functional matters and have guided them when they are in different countries and jurisdictions as their counterparties. I can provide assistance early on in a business discussion to help guide you and make sure you ask the right questions even before the commercial agreement needs to be negotiated, but if you are ready to put a contract in place I can most definitely help with that too.
November 16, 2021
Jeff C.
Jeff Colerick has been practicing law for over 30 years and has devoted his professional career to providing clients with intelligent representation and personal care. His experience as a lawyer involving complex matters has resulted in a long history of success. Jeff has built a practice based on a deep understanding of real estate assets and corporate activities. He combines his industry knowledge with a practical and collaborative approach to problem solving. Jeff’s client relationships are strong because they are built on mutual respect. Jeff talks the language of real estate and understands that it is a vehicle to deliver your business strategy. Jeff provides practical, responsive, and strategic advice related to real estate acquisition, construction, leasing, and sale of a wide range of real property types, including office, retail, medical, industrial, industrial flex-space, mixed-use condominium, multifamily and hospitality. As leader of the Goodspeed Merrill real estate practice group, Jeff represents clients with commercial and residential transactions, purchases and sales, land acquisition and development, real estate investment and financing, financing liens and security interests, and commercial leasing and lease maintenance, including lease enforcement support and advice. The firm represents clients in matters concerning construction, lending, developers, contractors and subcontractors, cell site leasing, property and boundary disputes, common interest community law, and residential condominiums and planned communities.
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Chia-Fen Y.
Attorney Yu represents clients in business and real estate transactions and has successfully handled more than 200 cases. She has experience in corporate law, including forming legal entities, employment law and workers’ compensation law matters pertaining to wage and hour violations, industrial injuries, misclassifications, and other employment-related torts and contracts. Attorney Yu works with employers to address employee relationship issues, develop effective policies and craft employment agreements. Attorney Yu regularly advises clients on the legal and business aspects of potential investments, ongoing business operations, debt collections, shareholders and partners disputes, business purchase agreements, risk assessment, intellectual property disputes, and potential contract disputes. She regularly handles real estate law matters such as landlord-tenant disputes, lease agreements, buy-sell disputes, title disputes, and construction disputes. She also has substantial experience settling debts, and she drafts, reviews and negotiates settlement agreements. Attorney Yu conducts extensive legal research and provides on-point legal advice to both corporate and individual clients.
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Harrison K.
Harrison Kordestani is an executive with over twenty-five years experience in entertainment and media, energy, technologies, and start-ups. Mr. Kordestani has also developed a specialized legal and strategic consulting practice representing select entertainment, oil and gas, mortgage lending, and technology start-up clientele. He is also deeply passionate about new technologies and has also actively worked in building companies in the video-on-demand, wearable tech, information of things, demand prediction and app-marketing spaces. As an attorney, Mr. Kordestani's focus has been on transactional drafting and negotiation and providing ongoing legal counsel, corporate compliance, and contract interpretation to numerous private individuals as well as companies in varied fields.