Are you interested to know the purpose and what the shareholders’ agreement entails? Then keep right this article.
A shareholders’ agreement is an agreement between the shareholders of the company that sets out the shareholders’ rights, privileges, and obligations with the foundation of how the corporation will be established and managed.
Moreover, when you have a shareholder’s agreement is a cost-effective way to minimize any issues that will arise later to make it clear how certain matters will be dealt with.
Also, to provide a forum for dispute resolution on issues that arise down the road. Taking the time to sit down and discuss some specific issues from the beginning can eliminate disagreements between shareholders and make sure that everyone is on the same page.
So, keep reading this article for more information on shareholder agreements.
READ MORE: The Importance of Shareholders’ Agreements – The Business Prenup
What Is a Shareholders Agreement?
Table of Contents
A shareholders’ agreement is first and foremost a contract between the owners of a company. Moreover, they are called the business prenuptial agreement as it lets the owners of the company make out a process to resolve disputes.
Also, to add rules to manage the company and ownership structure. It has important provisions like the decision-making powers of directors and shareholders, restrictions in the sale and transfer of shares, and the process to solve disputes.
Maybe you are the only owner of your business, then you don’t need to worry about shareholders’ agreement.
The Basics of a Shareholders’ Agreement
This agreement is intended to make sure that shareholders are treated well and that their rights are protected. Moreover, the agreement includes sections outlining the fair and legitimate pricing of shares especially when sold.
This allows shareholders to make decisions about what outside parties may become future shareholders and give safeguards for minority positions.
However, the agreement includes a date, often the number of shares issued, and a capitalization table that outlines shareholders and their percentage ownership.
Furthermore, any restrictions on transferring shares, and pre-emptive rights for current shareholders to purchase shares to maintain ownership percentages and details of payments in the event of a company sale.
How Shareholder Agreements Protect Minority Shareholders
Minority shareholders lack voting control of the company and in the absence of the agreement, these shareholders will exert minimal influence in the run of the company.
Moreover, key management decisions can be made by a few controlling shareholders that own more than 50% of the company and they cannot consider input from the minority shareholders.
However, the articles of association protect the minority owners and the provisions can be altered through special resolutions approved by the majority shareholders.
Furthermore, the shareholder agreement may address these loopholes by requiring that net company decisions be approved by all shareholders regardless of voting power.
Additionally, the rules limit the ability of the majority shareholders to overrule minority shareholders when making some decisions like taking new debt and the appointment and removal of directors.
READ MORE: What Is a Shareholders' Agreement? Included Sections and Example
What Is Included in The Shareholders Agreement?
The contents of a shareholder agreement vary in diverse companies. Some of the contents of the shareholder agreement are:
1. Parties
The first section of the shareholder agreement identifies the corporation as one party that is different from the shareholders (another party).
2. Board of Directors and Board Meetings
The shareholder agreement explains the role of the board of directors in the company and the requirement that decisions of the board should be approved by the majority.
Moreover, it states how frequently the board of directors holds meetings and how directors are selected and replaced.
3. Reserved Matters
This agreement should set out issues that cannot be passed without getting the approval of all signatories, not only the majority support.
However, create a list of reserved matters all shareholders are given the chance to get certain transactions to determine if they are prejudicial to their investment.
Furthermore, some of the commonly reserved matters are changing share capital, acquiring or disposing of certain assets, taking the new debt, paying dividends, and changing the articles of association and memorandum.
4. Shareholder Information and Meetings
This agreement should have a requirement that shareholders are entitled to regular updates on the company’s performance through quarterly reports and yearly reports.
Moreover, this should state the specific period when the reports should be sent out to shareholders. The agreement should state when shareholder meetings will be held, and the time, day, and venue of the meetings.
5. Share Capital and Share Transfers
The shareholder agreement should record the corporation’s share capital at the date when it was signed. Moreover, changing the share capital is one of the reserved matters, the directors are prohibited from issuing new shares or changing existing shares into a new share class without the signatories approving the changes.
However, it contains provisions that are related to share transfer such as preventing share transfer to unwanted parties, transfer shared to the new party, things that happen if the director or shareholder dies, as well as drag and tag provisions.
6. Amendment And Termination
The process to amend or terminate the shareholder agreement should be provided in the agreement. For instance, the shareholder agreement can be terminated upon the dissolution of the company, based on the written agreement, or after the lapse of a specific number of years from the date of the agreement.
READ MORE: What is a Shareholders Agreement? And Why do They Matter?
Conclusion
A shareholder’s agreement plays an essential role in defining relationships between shareholders and the company they invest in. To establish clear expectations, responsibilities, and mechanisms for dispute resolution, the agreement contributes to the stability, growth, and longevity of the business.
