A shareholder agreement is an agreement by the shareholders of a company that covers several issues, such as how shareholders can buy-in or buy-out of the company, voting rights, how disputes will be resolved, how the company will be managed, the proposed nature of the business, the nature and amount of initial contribution, future contributions, and how key roles and responsibilities are decided and maintained.

Key Elements of a Shareholder Agreement

There are key elements or issues that should be addressed in a shareholder agreement.

 

Duties, Rights, and Responsibilities

A shareholder agreement should spell out how the business will be operated and managed. An agreement may allow certain shareholders to elect persons to the Board of Directors, may impose restrictions on what shareholders are entitled to vote on key issues, and may require the company to supply shareholders with account or other information.

Board of Directors Duties, Composition, Compensation

The agreement should identify the board members, their employment, their duties, and the basis for continuing in a board position. The board is charged with hiring the executive management to run and manage the company’s business.

Because board directors are usually not company employees, the agreement should delineate the compensation for each director.

Shareholder Rights and Duties

A shareholder agreement should address the shareholders’ rights and duties, such as whether they have a right to participate in the management of the company and how disputes regarding the agreement will be resolved. Arbitration and mediation clauses may require shareholders to go through arbitration or mediation before suit can be initiated..

Voting Rights

A shareholder agreement must outline a shareholder’s voting rights and such things as what topics they may vote upon and the number of shareholders required to form a quorum at shareholder meetings

Share Transfer

A share agreement must outline the terms under which shares may be sold or transferred to others. Guidelines and options should be provided for in the event a shareholder no longer wishes to own shares in the business for reasons such as illness, bankruptcy, or incapacity. An agreement’s “buy-sell” provision provides for a shareholder right of first refusal, allowing existing shareholders the option to buy shares from departing shareholders.

Buy-Sell Agreements

A buy-sell agreement governs the how and when a person can buy corporation shares. A buy-sell agreement dictates:

• If a shareholder must be bought out
• Who is entitled to buy a shareholder’s shares
• What price must be paid for shares
• What events will trigger buyout

Buy-Sell Triggers

Certain events can trigger a shareholder’s right to a buyout of his shares. Buyout may occur when:

• The shareholder dies, becomes disabled, or becomes otherwise incapacitated
• The shareholder retires
• nother person makes an offer to buy the shareholder’s shares
• The shareholder’s shares are foreclosed upon
• The shareholder enters bankruptcy
• A divorce judgment grants a shareholder’s shares to an ex-spouse

Classes of Shares

A shareholder agreement discloses the different classes of shares and how profits and dividends will be distributed among each class.

Conclusion

A shareholder agreement is important vehicle for informing shareholders about their rights and duties within a corporation. An agreement should cover such issues as the duties and responsibilities of the board of directors, shareholder voting rights, and how shares are distributed, bought and sold.