WHAT IS A SHAREHOLDER AGREEMENT

A shareholder’s agreement is a document created by and for shareholders that explains the shareholders’ obligations and rights. The agreement also provides guidance on how the company should be operated. The agreement also provides specific information on the management of the company.

Although a shareholder’s agreement is not mandatory as is the articles of incorporations and or bylaws it is just as if not more than important than the former because the shareholder’s agreements speak to the manner in which the company should be managed and operated on a day to day basis.

WHY YOU NEED A SHAREHOLDER AGREEMENT

A shareholders agreement is needed to manage and regulate the company. The following are some reasons why you should consider the inclusion of a shareholders agreement in your startup:

• Provides a mechanism for shareholders dispute resolution

• Enables the regulation and management functions of the business

• Provides protection for both minority and majority shareholders with tag along and drag along provisions when buy/selling the business

• Control the transfer of shares by a shareholder and may specify the rights of first refusal to existing shareholders

• Specifies the company’s buyback share options in relation to shares issued to shareholders who are leaving company employment, we well as setting the share valuation mechanism

• Restrictions such as non-compete restrictions on exiting shareholders can be formalised

• Varied dividend policies can exist for different shareholders where different classes of shares exist

WHAT’S INCLUDED IN A SHAREHOLDER AGREEMENT

A shareholder’s agreement should include the following:

• The name of the company and the date of the agreement.

• A capitalisation table that provides a listing of the shareholders and the percentage of the company that each owns.

• Specific language that serves to protect minority shareholders.

• Protocol for limiting director actions.

• A shared business plan that has been carefully scrutinized and accepted by the majority of the shareholders.

• Clearly written steps on the manner in which disputes should be resolved. One of the more common of these provisions is the deadlock provision.

• Instructions on the way in which directors can be removed.

• Restrictions on the way and manner in which shares can be disposed of.

• Rules regulating the voting rights of the shares. Some of these regulations include the following:
  • Rights of first refusal
  • Lockdown rights
  • Preemption rights

• Language that will govern the management of the company including a provision that will create super majority voting rights for specific reserved matters.