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What Is a Shareholders’ Agreement?

As a shareholder, you want to be clear on what rights you’re entitled to.  A shareholders’ agreement acts as a contract that defines all of the terms and conditions surrounding the purchase and holding of shares in a business.

What is a shareholders’ agreement?

A shareholders’ agreement is a legally binding contract, governed by both state and federal laws. It is an internal document designed for shareholders specifically, and it must be signed before the transfer of sales occurs.

Shareholder rights may vary depending on the types of shares you hold. For example, a majority shareholder may have more rights than a minority shareholder. In some cases, the terms may differ between angel investors and venture capitalists. It’s important to be sure what exactly your specific status entitles you to. A shareholders’ agreement is a way to get these rights on paper.

Because it is governed by law, it helps to have an attorney oversee the process of writing a shareholders’ agreement.

There are many types of shareholders’ agreement, like a crowdfunding shareholders’ agreement and a shareholder loan agreement. Here, we’ll provide an overview of a standard shareholders’ agreement.

Why is a shareholders’ agreement important?

There are a few standard rules that organizations instill when it comes to shareholder rights, but not every company goes with the typical structure, and shareholder rights can vary within the organization itself, so a shareholders’ agreement can act as a guide or reference for what specific rights are afforded to you as an individual.

This will be especially useful in the case of dispute or strain on your business relationship. Having everything in writing, signed by both parties, ensures you have a strong legal backing should you feel the organization has breached contract, or vice versa.

It can be used by shareholders or potential shareholders to understand the balance of power across the organization.

What is included in a shareholders’ agreement?

Some of the most important factors that you should expect to be outlined in a standard shareholders’ agreement include the following:

Voting power and rights of veto

As a shareholder, you may have voting rights on decisions made in the organization. The shareholders’ agreement should describe the shareholder’s voting power, outlining what areas and items a shareholder will be entitled to vote on.

A shareholders’ agreement may include whether or not the shareholders have rights of veto. Some organizations may employ a rule that no major decisions can be made without unanimous approval from every shareholder, and rights of veto means that a shareholder is able to veto decisions.

The issue, transfer, and sale of shares

The shareholders’ agreement will state the terms surrounding the issuing of shares. It will also outline what rights the shareholder has when it comes to selling or transferring shares. It might detail the course of action should a shareholder face bankruptcy, in case of death, and in other cases where shares must be transferred involuntarily.

Some companies may have holding periods before a shareholder can sell any shares – and these terms will also be included in a shareholders’ agreement.

The shareholders’ agreement can also include the organization’s dividend policy.

Amendment or termination of the shareholders’ agreement

The procedure for amending or terminating a shareholders’ agreement will be outlined in the document. The agreement will state what conditions may require or allow for amendments, and what might cause the termination of the agreement.

The right to appoint directors

Shareholders may be given the right to appoint directors to the board of the organization, and this right will be stated in a shareholders’ agreement. Some types of shareholders may have the right to appoint non-executive directors, like venture capitalists, while others, like angel investors, may be able to take a more active role in the direction of the company. 

Management and operations

The shareholders’ agreement should offer shareholders a detailed idea of how the organization is structured, and how it is managed and operated. It will define the process for electing officers and directors, and whether a majority vote is required for major decisions to be made.

Dispute resolution

Shareholders’ agreements might define the dispute resolution process that will be undertaken should a conflict between the shareholder and the organization arise. A shareholders’ agreement might require all parties to agree to waive a jury trial and instead settle any disputes through an arbitration process that’s defined in detail within the contract.

These are a few of the most important details that you can expect to see in a standard shareholders’ agreement, but there are many other terms and conditions that it may define. All in all, a shareholders’ agreement is a contract that states all of the rights afforded to a shareholder.

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