A shareholders’ agreement, also known as a stockholders’ agreement, is a pact among shareholders that elaborates on how a company is to be operated. It delineates the rights and responsibilities of shareholders in spelling out the organizational management, the privileges given, and the security provided to the shareholders.
Key Takeaways
- A shareholders’ agreement is a pact among shareholders that delineates how a company will be operated.
- It aims to ensure equitable treatment and protection of shareholders’ rights.
- The agreement defines decision-making processes about outside parties joining as future shareholders and safeguards for minority positions.
The Basics of a Shareholders’ Agreement
A well-drafted shareholders’ agreement plays a crucial role in ensuring that shareholders are treated properly and that their rights are built into the core framework of the business. Key sections generally cover the equitable and legal pricing of shares, avenues for deciding on new shareholders, and mechanisms to protect minority shareholders.
Typical components of a shareholders’ agreement include:
- A date and specification of issued shares
- A capitalization table outlining shareholders and their ownership percentage
- Restrictions on the transfer of shares
- Pre-emptive rights allowing current shareholders to maintain their ownership percentages with new issue shares
- Payment details in case of sale of the company
Shareholder agreements function differently from company bylaws. Bylaws act in harmony with a company’s articles of incorporation to create the business’s legal nucleus and operational framework. In contrast, a shareholders’ agreement, which is often crafted for and by shareholders, stipulates specific rights and commitments. This can be particularly pivotal for corporations with a small active shareholder base.
Example of a Shareholders Agreement for an Entrepreneurial Venture
One category of businesses that greatly benefit from having a shareholders’ agreement in place is startup enterprises. Entrepreneurs setting up new ventures should be driven to draft a shareholders’ agreement among all involved parties. This can preclude misunderstandings about business operations as the company evolves and grows. A documented agreement can clarify intent and serve as a guiding reference to resolve future conflicts.
Key elements that entrepreneurs should consider incorporating into a draft agreement include criteria for shareholder eligibility, procedural outlines for cases where a shareholder can no longer actively own their shares (e.g., due to disability, death, resignation, or termination), and eligibility for board membership. Typically, a startup’s agreement could feature the following sections:
- Preamble: Identification of the parties involved (i.e., the company and its shareholders)
- Recitals: Statements of the agreement’s rationale and goals
- Buy-Back Provisions: Details on the non-compulsory or compulsory repurchase of shares when a shareholder exits
- Right of First Refusal: Clauses on the company’s priority in purchasing a shareholder’s shares before any outside sale
- Fair Price Notation: Either annually re-calculated share prices or a predefined formula
- Possible Insurance Description: Concerns related to insurance policies within the agreement
A carefully considered shareholders’ agreement is essential, protecting both the entity and its investors by curbing misunderstanding and conflicts, thereby ensuring lasting stakeholder harmony.
Related Terms: corporate bylaws, articles of incorporation, pre-emptive rights, capitalization table, minority shareholder.
