Key Elements Of A Shareholder Agreement

A shareholder agreement, sometimes referred to as a stockholder agreement, is an understanding among shareholders that spells out how a company is to be operated. Moreover, the shareholder agreement includes provisions that govern the shareholders’ rights and responsibilities. These contracts are critical to ensuring that the best interests of shareholders are protected and that they will be treated fairly. a Business & Corporate Law attorney will understand how to properly draft and execute shareholder agreements, along with addendums and modifications as needed.

While every shareholder agreement is different, there are a number of elements that are frequently included in these contracts. These are only a few of the most common provisions:

Terms and conditions concerning company stock.

To protect the rights of stockholders, various terms will address the fair pricing of shares. For example, the agreement will likely detail:

  • How many shares are to be issued
  • The respective percentage of company and shareholder ownership
  • A capitalization table which spells out the equity capitalization of the company
  • The rights of existing shareholders to purchase shares (pre-emptive rights)
  • Any restrictions on transferring shares
  • What happens to a shareholder’s ownership in the event of their death

Share subscription clause.

This clause is essentially an agreement to buy shares from the company. It will contain the terms on which the shareholder (also called a subscriber) will agree to purchase the shares. Some clauses are more detailed than others, but they typically include the number and class of shares to be issued, the amount to be paid by the subscriber, and the deadline by which the amount is to be paid.

Shareholder behavior.

Shareholders guide the direction of the corporation by nominating, appointing, or recommending the hiring of senior management. Minority shareholders also play a role by nominating members of the board of directors. Finally, the shareholders will hold corporate leadership accountable by insisting upon revenue and profit targets. The agreement will cover these and related matters.

Minority shareholder veto power.

Agreements usually contain provisions for minority shareholders to veto the actions of the majority. This is to ensure parity between the two groups and avoid accusations of minority shareholder oppression. Accordingly, this part of the shareholder agreement will specify what types of company business cannot be conducted without the consent of minority shareholders.

Deadlock clause.

In cases in which there are an even number of shareholders and a particular vote is evenly divided, a deadlock clause will prove essential. This portion of the agreement will set forth how to break the tie so crucial corporate business isn’t stalled.

Exit strategy.

There will come a time when a shareholder will want to share his or her shares. It’s important both for the departing shareholder to get a fair value for his or her shares, and for the remaining shareholders to not be harmed by the departure. The shareholder agreement may therefore require a minimum holding period. It could also limit who may purchase the shares (for instance, by giving the remaining shareholders a right to purchase them before being sold on the open market).

Of course, these are just some of the features of a strong shareholder agreement. Depending on your situation, there may be additional provisions that are necessary or helpful. The most important step you can take is to retain experienced legal counsel who can advise you and your company on how best to draw up an agreement that protects your shareholders.