What is a shareholder’s agreement?
A stockholders’ agreement, often known as a shareholders’ agreement, is a contract between shareholders that specifies the rights and responsibilities of each party and how the business should be run. Information on the company’s management, shareholder protection, and privileges are also included in the agreement.
The Basics of a Shareholders’ Agreement
The shareholders’ agreement guarantees equitable treatment and the protection of shareholders’ interests. Sections of the agreement specify what constitutes a reasonable and fair share price (mainly when shares are sold). It also gives minority positions protection and gives shareholders the ability to decide who, among other parties, could become shareholders in the future.
A date, the number of shares issued, a capitalization table listing shareholders and their percentage ownership, any restrictions on share transfers, preemptive rights for existing shareholders to purchase shares to maintain ownership percentages (for instance, in the event of a new issue), and information on payments in the event of a company sale are all included in a shareholders’ agreement.
Company bylaws and shareholder agreements are not the same. Together with the articles of incorporation, bylaws serve as the foundation for a company’s legal structure and operational guidelines. Conversely, a shareholder agreement is optional. Frequently, shareholders create for themselves this contract outlining specific rights and obligations. It may be beneficial when a company has few active shareholders.
An example of a shareholder agreement for a business venture
A shareholders’ agreement is something that many entrepreneurs who are starting new businesses will wish to establish for the original partners. This is to ensure the parties’ original intentions are clear. A documented agreement may be a reference point if disagreements occur as the business develops and evolves.
In addition, entrepreneurs should specify who may become a shareholder, what happens to shareholders who can no longer actively own their shares (due to disability, death, resignation, or termination, for example), and who can serve on the board.
- A startup’s shareholder agreement will typically include the following provisions, as it does with all shareholder agreements:
- An introduction that names the parties involved (e.g., a firm and its stockholders)
- A list of recitals (the agreement’s objectives and justification)
- Information on the company’s voluntary vs required share buyback program if a shareholder surrenders their shares
- a right of first refusal provision that specifies the company’s ability to buy the securities of a selling shareholder before the shareholder sells to a third party
- A fair share price is noted, which may be determined using a formula or recalculated every year.
- An example of an insurance policy description
Conclusion
- An agreement among shareholders of a firm that specifies the business’s operating procedures and delineates the rights and responsibilities of each shareholder is known as a shareholders’ agreement.
- The shareholders’ agreement guarantees equitable treatment and the protection of shareholders’ rights.
- It also gives minority positions protection and gives shareholders the ability to decide who, among other parties, could become shareholders in the future.
