Definition
A shareholder agreement is a binding contract between shareholders or owners of a company. A shareholder agreement will govern the relationship between shareholders and delineate control, ownership, management, shareholder rights and exits.
Essential Characteristics
Shareholder agreements should detail the following:
- Specifying what shareholders will make decisions and whether a distinction applies to the decisions of directors
- Voting rights of shareholders and directors
- The rights shareholders possess such as the appointment of board directors or observer rights
- How directors will be appointed and removed
- Dividend rights and how amounts will be decided
- How new shares will be issued, and how ownership interest will be governed or maintained
- The relationship between capital contributions and shareholdings
- How existing shares will be sold
- How the share price will be valued should the business be sold
- The circumstances where a shareholder will be forced to sell their shares and leave the company
- The rights and obligations of employees should they be shareholders via a retention or performance incentive
- Who approves the business plan and structure of the senior executive.
- Reporting obligations to shareholders
- How deadlocks will be resolved
- How disputes between shareholders will be resolved
- Circumstances that will trigger the default and termination of a shareholder
- The process that will govern the way a shareholder exits in the agreement if they voluntarily choose to do so, retire or pass away
- Company protections such as Non-competes, restraints and ownership of IP.
- Buy-Sell Agreements in the case of insolvency, disability, death or retirement.