A shareholder agreement isn’t required for your company, but it is a good idea to have one in place between shareholders and the company to prevent and resolve disputes. Whenever there are multiple shareholders in a business, disagreements are possible. A shareholder agreement clarifies who runs the company and how it is run. In the agreement, shareholders are protected, their responsibilities are defined, and management’s role is explained. By knowing each party’s rights and responsibilities, the company can benefit from a well-executed shareholder agreement that protects everyone’s interests.
In some shareholder agreement, however, important provisions are left out or are ambiguous. Your business could actually suffer if you have an incomplete or unclear contract. Shareholder agreements should be drafted by a lawyer and tailored to the specific business, but there are some standard provisions that are found in most contracts. Your shareholder agreement should include these 10 key items.
- Director selection (and removal) – Shareholders may have the right to appoint and remove directors. Shareholder agreements should specify how this right is exercised and how directors are elected or removed.
- Information on the power of managers and directors – A company’s management structure plays an important role in how the business operates. Shareholder agreements should specify the duties and rights of the managing director, as well as the division of labor between directors and managers.
- Purchasing and selling shares are governed by share transfer restrictions. These restrictions ensure that shareholders have some say over the business partners they choose. Minority shareholders who may have difficulty selling their shares may also benefit from provisions addressing their purchase and sale of shares. Shareholder ownership interests should be valued in the buy-sell contract in addition to the restrictions and rules for transferring and selling shares.
- What happens in the event of death, disability, or divorce. A shareholder may need to sell or transfer shares due to death, disability, or divorce. Shareholder agreements should specify what happens if any of these events occur. Can the shares be willed or can an ex-spouse inherit the business after death? Without addressing these issues, people may end up co-owning a company with someone they don’t like and are unwilling to work with.
- Business and shareholder protections in the event of involuntary transfers. An ownership interest may be forced to be transferred against a shareholder’s will due to bankruptcy. Companies without shareholder agreements may find themselves unable to control what happens to their shares.
- Financing details – The shareholders’ contract should specify how each shareholder will contribute to providing working capital to the company. Additionally, the contract should explain what happens if a shareholder does not have the funds to maintain the business.
- A procedure for resolving disputes– Conflicts always arise when multiple parties do business together. In addition to conflicts among shareholders, there may also be disagreements between directors and managers and between shareholders with different stakes in the company. In order to avoid arguments and cripple business operations, a procedure needs to be laid out for resolving these disagreements.
- Meeting requirements – Shareholders and directors should meet regularly and whenever something significant arises. A shareholder agreement should specify when and how meetings will be held, how quorums will be formed, and how special issues can be discussed.
- Shareholder contracts with companies – Shareholders of a company may contract with it, although this can result in conflicts of interest. Shareholder agreements should specify when and if contracts are permitted. As part of the agreement, shareholders should be informed about the terms and restrictions that may apply to company contracts.
- The confidentiality clause is necessary if you do not want your business information disclosed to the public. The shareholders’ agreement should be kept confidential, and the contract should include a clause that binds each co-owner to keep quiet about its details.
Shareholder agreements should include a number of different provisions. Make sure you do everything you can to protect your investment and allow the company to grow and thrive. At Owen Hodge Lawyers, we can help you draft a shareholder contract that will guide your relationship with your shareholders and protect your company’s future.