Shareholders are also known as stockholders. They are the owners of the corporation. The shareholders' agreement is sometimes called a stockholders’ agreement. This is an arrangement among a company's shareholders that details how the company needs to operate. It also outlines the rights obligations of the business and shareholders as a whole.
This type of agreement can be compared to that of a partnership agreement or an LLC operating agreement. These documents do not detail the operations of the company, instead, this is within the bylaws. These also explain the responsibilities of the board of directors. Alternatively, the shareholder’s agreement is only between the shareholders themselves.
How Does a Shareholder Agreement Work?
Shareholder agreements are governed by state laws. Despite this, federal laws are still involved. Regulations by the Securities and Exchange Commission (SEC) continue to be involved because shares are securities, and public shares as well. The purpose of a shareholder’s agreement is to hold for use within the company. These documents need to be held on file for the length of business of your corporation.
What Should Be Included in a Shareholder Agreement?
There are different sections that are typically included in the shareholder’s agreement. Although they often differ between corporations, they generally fall along the same lines.
Description of the Parties
Most often the first part of the agreement will explain the corporation as two parts. It will explain who is considered to be the corporation, while the shareholders are a separate party.
Dispute Resolution Procedures
One essential part of the shareholder’s agreement is the dispute resolution procedures. The company needs to know how it plans to have the shareholders vote, and if the majority versus two-thirds majority is required.
General Management and Operation
How both the directors and board officers are elected will be outlined, along with how the corporation operates as a whole. These management operations might include declaring dividends, how to dissolve the company, how to enter into bankruptcy, or change the general industry of the company.
This section outlines that the agreement will transfer to any new shareholders, but that they must acknowledge the said agreement. After the statement is signed then the new part is considered a shareholder. It also explains that all that is written in the statement is guaranteed to all shareholders.
Paying Dividends and How Shares Are Divided
Shareholder agreements often explain the rights of the shareholders, including how they are paid through dividends. This should also include how they may hold, sell, or transfer these shares. Another inclusive aspect is what occurs should a shareholder declare bankruptcy, or in case of death.
Directors and Board Meetings
There should be a specific section dedicated to both the board of directors and the meetings held. It should outline how the board of directors of the corporation works, and how the directors can be replaced if necessary. It should also include how often the shareholders need to meet, and that they are entitled to reports. Typically these are quarterly reports, as well as annual reports.
Share Capital and Share Transfers
The process for share capital and share transfers as outlined in the document. In the event that shares must be transferred or an amendment takes place, it must be done with a written agreement.
Why Should You Create a Shareholder Agreement?
Every company should create a shareholder agreement because of the benefits they offer.
Creating shareholder agreements works to protect shareholders. Although there are standard laws and rules for a corporation by the state, this protects the shareholders and provides them with more say in how the company is run and how decisions are made. This includes the decision on whether the corporation needs to vote as a 100% majority or two-thirds majority.
Details Terms of the Agreement
The shareholder’s agreement often details protection for even the minority shareholders. In many cases it can also aid majority shareholders should there be an offer on the company. In the events of death or dissolution, the agreement will make things very clear, and outline how the shareholders will have their shares valued.
Having a shareholder agreement has the potential to reduce conflict between shareholders. This is because it provides specific rules that are agreed to beforehand. Disputes can negatively affect a company and how it operates, this agreement works to ensure that disputes are resolved quickly and smoothly.
Content is Private
The content of the agreement should always be a private situation between the parties. This is beneficial because it is not sent to the state and is not a public document.
Help Attract Investors
This type of agreement can help attract investment into the business. It is extremely attractive to investors Investors when a company is clear in its rules and regulations. It provides a transparent situation to do business in.
Why Are Shareholder Agreements Important?
Every corporation that has shareholders needs a shareholders agreement. Even private corporations are required to have an agreement. In some cases, even closely held, small, private, corporations use these agreements more than large companies.
This is because a shareholders agreement focuses on a few specific aspect of business.
- Voting of shares of stock
- Restrictions and safeguards on shares
- Set out rights, duties, and obligations for the company and shareholders
- Explain shareholders relationship to the company
The shareholders agreement provides a method for the shareholders to control the ownership of the company. It also lays groundwork for settling disputes, and provides a method to accept future capital contributions by potential new owners.
What to Put in Your Shareholder Agreement
The above is only some of what should be included in the agreement. Each company is different and should be treated as such. In many cases you may need to outline more in the agreement in order to support your business. The most essential part of a shareholders agreement is that it is detailed enough so everyone understands their role, and the outcome of serious changes.