The guide discusses the most important aspects to consider in a shareholder agreement.
Introduction to shareholders agreement
When setting up a company it is recommended to go through a checklist for preparing a shareholder agreement. It is easy for future partners to assume that nothing will go wrong in the future. However, even if the business relation among the partners is based on trust and respect, it is still highly recommended to draft a shareholders’ agreement. Besides the articles of incorporation and bylaws, the partners should also include a shareholders’ agreement. This document protects the shareholders and establishes a fair relation between them.
A shareholders’ agreement is a contract signed by the shareholders of a company and lays out key aspects of their business operation.
A shareholders’ agreement can be signed by all or some of the shareholders and can address a variety of issues including the operation and management of the company, termination of employment, receipt of an outside offer to buy or shareholder’s retirement. However, at its core, the purpose of this agreement is to protect the investment of shareholders in the company and to establish a fair relationship between them.
Shareholder Agreement Checklist: Background
This article furnishes the checklist for preparing a shareholder agreement without providing an exhaustive list. Instead, the checklist serves as an initial guide for drafting a shareholders’ agreement and should include the following:
Background. Shareholders should consider providing the company’s details such as the company’s name, business address and place of incorporation. The names and the addresses of shareholders should also be included. It is recommended that all the shareholders’ names and addresses are included in the agreement regardless of the number of shares they own. In addition, the shares allocated to each shareholder should be included together with the details of capital contributions.
Shareholder Agreement Checklist: Common Aspects to Consider
Common aspects to consider. When drafting the shareholders’ agreement, shareholders should consider introducing clauses about future share issues, election of directors and the rights of shareholders who are directors or executives in the company. Shareholders should also consider introducing limitations that could protect the minority or majority shareholders and clauses related to buying and selling shares, drag-along and tag-along rights. Normally, the shareholders’ agreement includes pre-emptive rights for the existing shareholders and details regarding the dividends. From the beginning shareholders should consider what the ratio of sharing profits and reinvesting is. If shareholders decide to pay dividends, the agreement must outline how and when these payments are made. On the other hand, if shareholders decide to reinvest the profit, the agreement must outline the amount, when and how the profit will be reinvested.
Decisional aspects. Furthermore, the shareholders’ agreement should also establish key decisional aspects. For instance, it should include provisions for possible mergers and acquisitions, sale or change in the business, sale or purchase of significant assets, external funding such as loans and execution of contracts. Moreover, the shareholders’ agreement should include a termination clause.
Employment aspects. The shareholders’ agreements should include details regarding employment issues. It can include the number of directors, the persons to be elected directors, their functions and the resolution of potential disputes. Moreover, the shareholders’ agreement should include whether shareholders can become a director or executive. This agreement can also provide the compensation paid to a shareholder employee and their benefits. Lastly, the agreement should also include the conditions for termination of employment.
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