Shareholders’ Agreement

A Shareholders’ Agreement is simply an agreement governing the relationship between the shareholders of a company. These include their rights and obligations, transfer of shares, how the company is going to be run and how important decisions are to be made.

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Advantages of a Shareholders’ Agreement

Clarifies Power

A Shareholders’ Agreement clarifies all the powers of a shareholder and the rights you reserve as the issuer of such shares by defining the rights and liabilities of all. Moreover, it acts as a regulator of the relationship between small and large shareholders.

Makes Changes Easy

Shareholders’ Agreements are perfect for small and medium companies that don’t want to formally amend the constitution every time there is a small change.

What to Include

What’s included in a shareholders’ agreement depends on the purpose of the agreement, but a typical one might provide the answers to such questions as:

• who can be a shareholder;
• who can serve on the board of directors;
• what happens if one of the shareholders becomes disabled or dies, files personal bankruptcy, resigns, retires or is fired;
• how much shares of stock are worth;
• whether the corporation will be required to purchase the shares of a shareholder who’s leaving;
• and how much will be paid for the purchase of such shares.

What You Need to Know

Remember, all shareholder agreements are voluntary and consensual. They must have reasonable terms and conditions, be interpreted according to general principles of contract law; and cannot be entered into for the purpose of defrauding anybody.

The Buy-Sell Agreement

The most common type of shareholder agreement, a buy-sell agreement, spells out the details of buying and selling shares in a corporation and may create a market for your shares.

Sections of a Typical Agreement

1. Preamble. This short section merely identifies the parties to the agreement. Normally, the corporation and the shareholders are the only parties.
2. Recitals. Here you set forth the reasons for entering into the agreement and the goals to be accomplished by the agreement.
3. Optional vs. Mandatory. Throughout the agreement, you need to determine under what circumstances a buy back of stock shares will be optional or required. If you want the company to be required to purchase back the shares from a leaving shareholder, use “shall.” If you want the purchase to be optional, use the word “may.”
4. Right of First Refusal. This clause states that if a shareholder decides to sell or transfer his shares to an outside party, he must give the details of the sale to the corporation and allow the corporation and remaining shareholder(s) to match the offer of the outside party and purchase the shares. This clause keeps a departing shareholder from selling his shares to anyone without the remaining shareholder(s) knowledge or consent, thus putting the remaining shareholder(s) “in business” with someone who might not be as skilled as the selling shareholder or have very different goals.
5. Determining a Fair Purchase Price. Usually this is determined in one of two ways: Stating a dollar amount per share that all parties agree to and which can be updated yearly, or agreeing to a formula that will be used to determine a fair price at the time of the triggering event. You may need to work with an accountant to help you establish a reasonable formula.
6. Insurance Policies That Provide Buy Out Money. Unless the corporation has purchased and paid into an insurance policy to provide funds to be used in buying out a selling shareholder, the remaining shareholder(s) may find themselves writing a personal check to cover the sale. Be sure to get advice from a knowledgeable insurance professional and an accountant before choosing an insurance policy, but certainly think about having one