Shareholders’ Agreement

Things You Should Include In A Shareholders’ Agreement

If you already have a group of people who are prepared to invest in your company, it’s important that you know and understand the importance of having a shareholders’ agreement. Primarily, a shareholders’ agreement refers to an arrangement among the company’s shareholders that outlines their rights and obligations, information about the management of the company, and, more importantly, the privileges and protection afforded to the shareholders. In other words, having a shareholders’ agreement is crucial when working with the company’s shareholders in setting the parameters of how the business should be run correctly.

So, if you’re drafting a shareholders’ agreement for the first time, below are the things that you should include in the document from the get-go:

1. Shareholders’ Names And Their Respective Responsibilities

Since a shareholders’ agreement is considered a business contract, all shareholders involved should be named in the document to make sure they’re the ones you’re working with. Along with their names, you should also write down the address and the phone number of each shareholder who’s taking part in the contract.

Moreover, this agreement should also specify the responsibilities of each shareholder. This is to avoid potential disputes among shareholders when it comes to keeping the business running smoothly. When specifying their responsibilities, you should outline the rules and regulations involving the appointment and termination of the officers. Also, you should include each shareholder’s duties that they can take in the name of the corporation.

2. Shareholders’ Voting Rights

When your business is growing, it’s more likely that you’ll have plenty of shareholders to help you manage the corporation. Because of this, it’s important to include in your shareholders’ agreement the voting rights of each shareholder involved. In short, the document should define the type of vote required from each shareholder to make a decision.

Typically, most corporations require a majority vote of the shareholders or 51% of all the members for a business decision to move forward. However, even if you require a majority in major decision-making processes, you can also lay down certain parameters in the agreement wherein you want to give the shareholders the sole discretion in making some decisions. In case you’re starting a business and unsure about this topic, this can be one of the most important questions to ask an attorney.

3. Dividends And Funding

Another thing that should be included in the shareholders’ agreement is the rules and regulations involving dividends and funding. This legal document should also specify the situations when dividends will be payable to the shareholders. When it comes to funding, the shareholders’ agreement should also provide the terms as to who among the shareholders will have preferential rights to provide funding before the company looks for external funding.

Shareholders’ Agreement

4. Regulations On How Stocks Can Be Sold Or Transferred

Typically, when your business has been operating for a couple of years, there’ll be a need for the company’s stocks to be sold or transferred to another shareholder to safeguard the shares and interests of the business. In such a case, you can detail in the shareholders’ agreement the specific regulations when it comes to the selling or transferring of stocks.

Moreover, you can also make provisions that prohibit certain sales or transfers. For example, you can specify in the document that the heirs of the original shareholders can’t inherit the shares upon their death to protect the corporation. Also, if your company is a family business, you can also place some restrictions on who can inherit or purchase your shares to ensure the business stays with the family.

5. Build An Exit Strategy

Aside from the rules in setting up the business, a shareholders’ agreement should also find out what will happen in case a shareholder wants to exit. This is commonly called the exit strategy. Generally, an exit strategy is an essential part of a shareholders’ agreement because it details the procedures in the event one of your shareholders decides to leave the company and pull out all their shares.

6. Deadlocks And Disputes

Just like other types of business organizations, your corporation may also be susceptible to a deadlock or dispute. This can be due to any misunderstanding among the shareholders of your company. Because of this, it’s important to add a provision in your shareholders’ agreement detailing the rules and regulations on how to handle deadlocks and disputes arising from conflicts. That way, you can make sure a smooth management of your business operations.

Bottom Line

As mentioned, drafting a shareholders’ agreement can help ensure that all shareholders are fairly treated and their rights are properly safeguarded. Therefore, if you want to make sure you don’t miss any important subject matter, keep this article in mind and you’ll be able to create a legal document that suits your business needs.

However, if you want to let a professional make this agreement, you can do so by hiring the best business attorney for you. Doing this can make sure everything is done legally and without potential hitches.

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