What You Should Know About A Shareholders Agreement

Whenever a private company has two or more independent shareholders, they will often be told that they should have a shareholders’ agreement. Like any good written agreement, a shareholders’ agreement can clarify what the parties to the agreement originally intended.  The relationship between the shareholders should always be agreed in some form. If disputes arise later about what was agreed to and parties to the agreement remember things differently, a well-written agreement can help resolve issues. Also, putting something in writing forces the shareholders to deal with some “what if” scenarios before any of those scenarios ever become a reality, sometimes business partners find they have unanticipated disagreements. If disagreements arise, it can be very helpful to have a clear idea of what the parties agreed prior to their dispute or before something changes one partner’s ability to continue in the business.

It should be noted that a formal written agreement, in addition to the company’s articles, is not always needed the default position regarding this is majority ruled. A majority of the directors and a majority of the shareholders can do almost anything, especially if they hold 75% of the shares. The exception on this is that they can’t force a shareholder to transfer his shares, except in very limited circumstances A minority shareholder who does not like the way the company is run has very little comeback, unless misconduct is involved.

The buy-sell agreement is the most common type of shareholder agreement, a buy-sell agreement, spells out the details of buying and selling shares in a corporation and may create a market for your shares. What’s included in a shareholders’ agreement depends on the purpose of the agreement, but a typical one might provide the answers to such questions as: who exactly can be a shareholder; who can serve on the board of directors; what happens if one of the shareholders becomes disabled or dies, files personal bankruptcy, resigns, retires or is fired; how much shares of stock are worth; whether the corporation will be required to purchase the shares of a shareholder who’s leaving; and how much will be paid for the purchase of such shares.

Particular sections of a typical agreement might include: Preamble, this short section merely identifies the parties to the agreement, the corporation and the shareholders will most likely be the only parties. Recitals, here you set forth the reasons for entering into the agreement and the goals to be accomplished by the agreement. Optional vs. Mandatory, t throughout the agreement, you need to determine under what circumstances a buyback of stock shares will be optional or required. Right of First Refusal, this clause states that if a shareholder decides to sell or transfer his shares to an outside party, he must give the details of the sale to the corporation and allow the corporation and remaining shareholder(s) to match the offer of the outside party and purchase the shares. Various other sections such as insurance policies that provide buy out money may also be included. It should be noted that all shareholder agreements are voluntary and consensual. They must have reasonable terms and conditions, be interpreted according to general principles of contract law; and cannot be entered into for the purpose of defrauding anybody.