Shareholder Agreement Definition

Shareholder Agreement Definition

The definition of a shareholder agreement is a legally binding contract among the shareholders that outlines how the company will operate and defines the shareholders’ rights, protections, and obligations. While shareholder agreements are optional, it’s a good idea to put all your agreements in writing to avoid problems later.

Startup companies and closely held corporations, as opposed to publicly traded companies, are the most likely to need and have shareholder agreements. 

Other Names for a Shareholder Agreement

What are a shareholder agreement’s other names? Primarily, shareholder agreements are also known as stockholders’ agreements. They’re different from corporate formation documents, such as the Articles of Incorporation.

What’s included in a shareholder agreement?

It’s up to each group of shareholders to decide what they want to include, but the following provisions are common shareholder agreement examples.

Identifying Information

The contract begins with the date, the parties to the agreement, and a section identifying the management of the company. 

Capitalization Table

A capitalization table is a list of the securities your company has issued and who owns them. It clarifies each shareholder’s percentage of ownership.

Relationship Between the Corporation and the Shareholders

Particularly for a small business or a legal entity in which shareholders will have management authority, it’s important to clarify who will make decisions. Though some of this information may be in the Articles of Incorporation, the shareholders can provide greater detail in the shareholder agreement. 

Share Rules and Restrictions

A key component of the shareholder agreement is outlining rules for valuing and transferring stock shares, including defining:

• How to determine a fair price per share
• Who may purchase shares
• Pre-emptive rights of current shareholders to buy shares later to maintain their ownership percentage
• How shares will be bought and sold in cases of a shareholder’s retirement, disability, death, or insolvency and any related impact on shareholders’ taxes

It’s also important to decide the process for amending these rules and restrictions.

Protections for Minority Shareholders

Minority shareholders do not by default always have the same rights as majority shareholders. If they want to ensure they’re able to attend shareholder meetings or receive dividends, for example, they should include these provisions in a shareholder agreement. 

Shareholder Notification

The agreement should specify when the shareholders should expect to receive notifications (such as quarterly reports) and whether they may attend corporate meetings.

Dispute Resolution 

Any contract should include provisions for how disputes will be resolved (arbitration, civil litigation, etc.) and what jurisdiction’s law will apply. 

Environmental and Ethical Practices

More companies are now including provisions setting forth environmental goals and policies. Shareholders may also want to clarify ethical guidelines for the company. 

Shareholder Agreement Benefits

One of a shareholder agreement’s advantages over the Articles of Incorporation is that it may be kept confidential. As private contracts, shareholder agreements need not be publicly filed. 

Shareholder agreements also may protect the corporation by prohibiting shareholders from competing with the company or directly soliciting its clients.

Shareholder Agreement Disadvantages

Putting all the shareholders’ rights in writing can reduce the management’s ability to run the company in a flexible manner. This is particularly true if the agreement contains a great deal of reserved matters, or those that require approval of all of the signatories instead of just a majority.

Protecting minority shareholders’ interests also can impede majority shareholders’ ability to make decisions.

Summary

A shareholder agreement’s business definition is a binding contract among shareholders outlining their rights, protections, and obligations as well as how the company will operate. 

We Can Help

If you’re a business owner who expects to have shareholders, it’s a good idea to form a corporation. We can help. Once you’ve taken that step, have your shareholders draft a shareholder agreement to prevent disputes and liability issues later.