Many business owners need capital to start a business, so they turn to friends, family, and investors for help. As a result, these individuals may be eligible to receive shares of the company or equity in the event of future success.
Sometimes these arrangements seem informal and friendly, and no written document is necessary. In contrast, business owners and shareholders who do not document their arrangements through a shareholder agreement may encounter conflict and confusion in the future.
Shareholders’ agreements: what are they?
In a shareholders’ agreement, shareholders agree to:
- Shareholder roles and rights
- Shareholders’ obligations to the company
- How shares are bought and sold
- The important decisions that will be made within the company
- Management of the company
- Disputes between shareholders
- In case of death, divorce, bankruptcy, or incapacity of a shareholder
Hence, a shareholders’ agreement describes how shareholders will interact with other officers in the company, and what role they will play.
Shareholder Rights: Protecting Yours
In reviewing a draft shareholders’ agreement, every shareholder should look out for certain key provisions. Your shareholders’ agreement should first include a buy-sell provision. As a result, you can get rid of your shares, leave a company, or purchase more if you so desire. An example would be when a shareholder dies, and their heirs (who could be anyone) can’t take over the company. As an alternative, if a shareholder divorces, the buy-sell prevents his or her ex-spouse from controlling the company.
Despite the best intentions of all members of a company, conflicts and disagreements are inevitable. Eventually, some shareholders may decide to leave the company when these conflicts are no longer negotiable. Your shareholders’ agreement must allow you to sell your shares.
Furthermore, your agreement should specify how meetings, decisions, and voting will take place. As part of the agreement between shareholders and officers, each party should describe how major decisions will be handled, such as moving into a new market or making significant changes to strategy.
In meetings, will these topics be discussed? Are officers primarily responsible for handling them? Will you be able to vote on issues that may affect the value of your shares? All of these issues should be addressed in a comprehensive shareholders’ agreement.
Additionally, minorities should pay special attention to how voting rights are allocated. In the event you disagree with the majority shareholders, you should know whether you have the right to veto certain types of transactions.
Preserving Future Interests
A shareholder agreement should also contain provisions protecting the company’s future interests. As an example, your agreement may include a non-compete clause that prevents shareholders from leaving and taking important information to a competitor.
As well, shareholders’ agreements may contain confidentiality provisions that apply to shareholders and officers. Meetings would be able to discuss sensitive business information without exposing it to third parties.
Shareholder agreements drafted
When reviewing a shareholders’ agreement, there are many factors to consider. It depends on whether you are a majority or minority shareholder, and what other concerns you may have.