What Is a Shareholder’s Agreement?

What Is a Shareholder’s Agreement?

Whenever you are setting up a company or a business, especially with friends or family, it is not surprising that people can assume that nothing bad will ever happen in the future because they are all trustworthy. You might even assume that the sheer trust you share with your friends/family makes the placement of a shareholder’s agreement redundant. Even asking for one could in fact make it seem like there is a lack of trust between you and them.

Ideally, nothing would go wrong in the future but that is just not how things work. There might come a time when there are disagreements between the most amicable of people and if the worst happens, you might as well end up having nothing when the dust settles. It could result in the loss of a non-work related relationship with the friends/family you are in business with, and it would come at a great financial cost.

A well rounded and properly drafted shareholder’s agreement can actually prove to be more beneficial for you and your company by giving you and all those you are in partnership with a certain sense of security in case of any unwanted scenario. In an ideal situation, nobody would want to have to rely on the terms and conditions in a shareholder’s agreement but there are always cases where the shareholder’s feel that they should have made the proper effort and invested adequate time into drafting up a better shareholder’s agreement.

What is a Shareholder’s Agreement?

Simply put, a shareholder’s agreement is a contractual agreement between the shareholders of a company. This can be in between all or some of the shareholders in a company. The purpose of a shareholder’s agreement is to protect the shareholder’s investment made into the business or company. It also helps to establish a healthy and fair relationship between the shareholders of the company and decides how the company is going to function.

The agreement is made to:

  • Define the shareholders’ rights and their duties
  • Regulate the sale of shares in the company
  • Define how the company is going to be run
  • Provide even the minority shareholders in the company and the company itself a sense of protection
  • Define how all the important decisions pertaining to the company are going to be made.

It is best to put the shareholder’s agreement in place when you from the company itself and issue the first shares. It is actually a very good exercise to get an overview of all the shareholders’ expectations from the business right there when you are starting it off. It will also give you a good perspective on whether or not there can be a good and healthy working relationship between you and your business partners. If there are strong disagreements between you and the other shareholders right at the start of the company, then you might want to reconsider your participation with them in the business.

What Should a Shareholder’s Agreement Entail?

The inclusion of terms within the shareholder’s agreement depends on the number of shareholders involved in a company and your level of shareholding but there are a few basic things that you should know have to be included within the shareholder’s agreement. They are as follows:

  • Issuing and Transferring Shares: That also includes the provisions that will prevent any unwanted third parties from being able to acquire shares. It should also define the process through which a shareholder can sell their shares.
  • Provision of security to minor shareholders: There should be certain clauses within the shareholder’s agreement that will provide protection to the shareholders of less than 50% of the total shares within a company.
  • How the company is run.
  • Paying the dividends.
  • Restrictions on competitions.
  • Procedures to resolve disputes.

Advantages of Shareholder’s Agreement

A company’s running is mainly decided by the majority shareholders, and minority shareholders have less of a say in the running of the company. Often the running of the company will depend on one or two of the major shareholders. Being a minority and having a shareholders’ agreement can ensure that certain important decisions that have a significant impact on the company will have your say in the matter too. And as a shareholder, you can have a clause included in the agreement, which  states that if there is someone willing to buy the shares of the major shareholders, that shareholder can only sell the shares if that same offer is being made to all the shareholders. That includes you as a minority shareholder.

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