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Shareholder Agreement

shareholder agreement is a legally binding document that establishes the rights and responsibilities of a company's shareholders. This type of agreement generally covers how the company's board of directors is elected, how shareholders can vote, how shares are valued, and how shares can be transferred, among other matters.
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What are Shareholders?

Shareholders are individuals who own stock in a company. Typically they elect the members of a corporation’s board of directors, which then elect the corporation’s officers who run the company. They are, in effect, the company’s owners.

Who Signs a Shareholder Agreement?

In a word, shareholders. If a company has just one shareholder, an agreement isn’t necessary. If a company has a majority shareholder who owns more than 50% of the company and that majority shareholder has the power to override decisions other shareholders make, then an agreement may not be necessary either.

However, if multiple shareholders have contributed assets to the company, whether cash or expertise, it’s probably wise for them to enter into a shareholder agreement.

Shareholder Agreement vs. Bylaws

The primary difference between a company’s shareholder agreement and its bylaws is that the former is optional.

Bylaws lay out the governance structure and day-to-day operations a company will engage in. They are a necessary part of registering a company with a state.

On the other hand, a shareholder agreement, which essentially is a private contract among people who own stock in a company, is optional. While this is not required to run a business, it’s highly recommended and can make resolving disputes much easier, less time-consuming, and less expensive.

Key Elements to Include

Below are typical sections included in a shareholder agreement. Every agreement will differ depending on a range of factors, including the state laws where a company is registered.

  • Preamble: This introduces the parties to the agreement and the company in which they own stock.
  • Recitals: These are the general goals of the agreement.
  • Capitalization Table: A capitalization table shows what percentage of the company each shareholder owns and the value of their holdings at the time of investment.
  • Shareholder Rights: This section outlines voting and decision-making.
  • Shareholder Responsibilities
    • Transfer Restrictions: A shareholder agreement usually restricts a shareholder’s ability to sell shares to a third party. The reason for this is that the owners of the company want to vet and know any new owners.
  • Right of First Refusal: Typically a shareholder agreement includes a clause that gives the company the right to buy a shareholder’s shares before they’re sold to a third party.
  • Pre-emptive Rights: These are the rights of shareholders to buy new stock issues first.
  • Tags and Drags: Tag-along rights give minority shareholders the option to sell shares at the same time for the same price. Drag-along rights give a majority shareholder the right to force other shareholders to sell their shares.
  • Dispute Resolution: Typically shareholder agreements outline how disputes among shareholders will be resolved.
  • Shotgun Clause: Also known as a “buy-sell clause,” a shotgun clause forces shareholders to either buy out a shareholder offering to sell their shares

FAQs

What’s the purpose of a shotgun clause?

A shotgun clause, which essentially forces a shareholder to buy or sell, is a means of dispute resolution and is typically invoked when a company is in distress.

Does a shareholder agreement have to be notarized?

Typically, no. To become a legal instrument, the agreement must be signed by all shareholders named as signatories.

Are there exceptions to the transfer restrictions?

The most common exception is that shareholders can bequeath their shares to heirs or an entity they own upon death.

What’s the risk of not having a shareholder agreement?

Probably the biggest risk is that without a shareholder agreement, disputes among shareholders can be messy, complicated, and expensive to resolve. Another risk is diminished confidence from potential investors in the company.

Sample Shareholder Agreement