The Importance Of Shareholders’ Agreement

In the world of business, various unfavourable circumstances can undermine a business venture or impede its functionality and progress. Hence, as a business proprietor, it is your legal responsibility to prevent or minimize the impact of such events on your business. And one of the best ways to do that is to have a shareholders’ agreement drafted.

But what does a shareholder agreement entail? Which types of business ventures does it cover? And most importantly, how can one create such an agreement? These questions and more will be addressed in this blog post.

So, stay tuned and continue reading.

What is a Shareholders Agreement?

We can liken a shareholder agreement to a good insurance policy to easily understand this concept. The same way good insurance, be it life or property insurance, will protect or save an entity from a lot of uncertainty and grief is the same way a shareholder agreement will protect the interests of everyone involved in a corporation.

A shareholder agreement, which can also be called a stockholders’ agreement or shareholders’ pact, is a legally binding contract between the shareholders of a company. It typically outlines the shareholders' rights, obligations, and responsibilities to the corporation and governs their relationship with each other and the company itself.

Shareholders’ agreement also seeks to protect the interests of shareholders and bring much-needed stability within a company. It should, however, be noted that this form of agreement doesn’t only cover the shareholders that make up a corporation. But it also covers founders or investors in startups or ventures owned by multiple entities.

Another important thing to note is that a shareholder agreement can be customized to meet the specific needs and circumstances of a company or the shareholders. This means there’s no “one size fits all” type of agreement since shareholders in a corporation do not always own the same parentage of share. Plus, they all come from different family life cycles and financial backgrounds.

And lastly, shareholders' agreements must be reviewed periodically. It is always important to do this because financial and family situations are subject to continual change. Hence, it is always a good idea to review the agreement to capture all these changes.

How Important is the Shareholders' Agreement?

The importance of having a shareholders agreement in place, particularly in companies with multiple shareholders or investors, simply can’t be overstated. This section will examine some key reasons why the agreement is vital.

1. To protect shareholders’ rights and interests: The primary role of a shareholder agreement is to protect the right and interests of the shareholders. It also defines their ownership rights, voting rights, and entitlement to dividends and distributions, preventing potential abuses or conflicts.
2. It helps resolve disputes: Another big advantage of shareholders' agreements is that they can be used to resolve disputes among the shareholders. This is because a typical shareholders agreement comprises different dispute-resolving mechanisms such as mediation, arbitration, or litigation procedures that can help address conflicts in a structured and fair manner.
3. Protecting Minority Shareholders: As we said earlier, the shareholders’ agreement covers all business ventures irrespective of the size and the number of shareholders. For example, in companies with majority and minority shareholders, the agreement can also come in handy. In that, it will protect the rights and interests of the minority shareholders.
4. Ensuring Decision-Making Efficiency: Shareholders' agreement also facilitates an effective decision-making process within the company. It prevents conflicts or deadlocks by defining the majority or supermajority requirements for important decisions, ensuring smooth operations.

Common Clauses Found in a Shareholder Agreement

A typical shareholders agreement usually contains some important clauses. We are going to discuss some of them in this section.

1. Ownership and Share Transfer: To some extent, this is one of the important clauses outlined in the shareholders' agreement. This clause outlines the shares held by each shareholder and any restrictions or conditions on transferring their shares.
2. Shareholder Obligations: This clause outlines the responsibilities and obligations of the shareholders to the company or corporation.
3. Dividends and Distributions: This clause shows how the profits generated will be distributed among shareholders. This could be through dividends or other means.
4. Exit Strategies: If, for instance, one of the shareholders wishes to exit the business, this clause will address such scenarios. This clause's purpose is to ensure a smooth and peaceful exit for any shareholder that wishes to walk away from the corporation.
5. Termination or Breach of Contract: This clause details the consequences of a shareholder’s breach of the agreement or termination of the shareholder’s rights.

Some other clauses in a typical shareholders agreement include a dispute resolution clause and a non-disclosure clause.

How to Draft a Shareholder Agreement

1. Identify the Shareholders: You can’t create a shareholders agreement unless you have people buy shares in your business. Hence, the first step towards drafting a shareholder agreement would be determining who the shareholders are and their respective ownership percentages.
2. Define the Purpose and Scope: After you have identified the shareholders, the next step would be to define the scope and objective of the agreement.
3. Discuss and Negotiate Terms: After you have defined the terms of the agreement, the next thing would be to call the shareholders together and discuss the terms and clauses of the agreement.
4. Draft the Agreement: If the shareholders agree with the terms and clauses, the next big step would be contacting a qualified lawyer to draft the agreement.
5. Review and Sign the Agreement: Before signing the agreement, all the concerned parties must review the agreement. If they have no issues with it after reviewing it, the last step is to sign the agreement.

Seek Legal Advice at Stevens and Company Law Corporation Today!

Whether you are a business owner or a shareholder, before you sign or draft any shareholder agreement, engaging a lawyer with expertise in corporate law is always advisable. At Stevens and Company Law Corporation, we can assist you and ensure you comply with applicable laws and regulations.