A shareholders’ agreement is a legally binding contract between the shareholders of a corporation that outlines their rights and obligations. More importantly, it details the extent to which they can exercise their rights in the company. The shareholders’ agreement aims to safeguard all shareholders’ interests and ensure that no shareholder can unilaterally bring a stranger into the company when they decide to buy out.
Key elements of a shareholders’ agreement
A shareholders’ agreement is different for every company because it is dependent on the nature of the business entity, the operations of the company and the class of shares. However, there are key components that you should consider when drafting a shareholders’ agreement:
- A preamble that details all the parties entering the agreement
- The intention and goals of the agreement
- The rights and obligations of shareholders (Examples: veto rights, voting rights, rights to transfer ownership)
- A clause on the transfer and issuance of shares, including selling and buying shares
- A right of first refusal clause
- Dividend payments and distribution of earnings
- A restrictive clause on how to eliminate members of the board
- A clause that restricts the power of members over significant company decisions
- The fair price of shares
- Protection for minority and majority shareholders
An explicit dispute resolution clause is one of the most critical elements in drafting a shareholders’ agreement. Through this mechanism, the company can prevent business disputes from worsening simply by following protocol.
Why is a shareholders’ agreement important?
A shareholders’ agreement is optional, but it delineates the professional boundaries of the shareholders. If a shareholder no longer has the power to exercise control over their shares, the agreement needs to detail the buying back of those shares, whether optional or mandatory. It protects the company from outsiders, prevents bias and facilitates objectivity. A shareholders’ agreement helps govern the parties when disputes arise and relationships deteriorate.