Shareholder agreement

Shareholder agreements are sometimes overlooked and deemed “unnecessary” by shareholders at the outset of a business, but the absence of an agreement early on can lead to huge problems down the road.  It is highly recommended that any company with shareholders have a shareholder agreement drafted.  

A shareholder agreement is a legal document which specifies the rights and regulations of a shareholder in a corporation. It’s used when a business and any third parties are entering into a business based on ownership of shares of a corporation.  A shareholder agreement contains shareholder details, management decisions, share valuation and other information. 

When do you need a shareholder agreement? 

If there is more than one stakeholder in the business, a shareholder agreement can define the terms and conditions of the relationship of stakeholders with the business. A shareholder agreement is also helpful if there are silent investors or foreign investors putting equity by defining their limits on the ownership and rights of the business. The shareholders in a Shareholder Agreement are the individuals who own shares in the company. They may own equal shares or different percentages. Shares are generally classified as A or B, A being voting shares, and B being non-voting shares. 

A good shareholder agreement needs to cover 5 major aspects including decision making, entrance, exit, compensation and return on investment.  

  • Decision making covers how business decisions and disputes are managed  
  • Entrance describes situations for adding additional shareholders.  
  • Exit determines how shareholders can leave the company and how outgoing shareholders will receive a fair value.  
  • Compensation is based on the role played by the shareholder. 
  • ROI covers how dividends/returns are paid. 

It is highly recommended to review the shareholder agreement with a lawyer as the rights of shareholders determine the structure and financials of a company. A review by a lawyer will also help strategize the growth of business without any limitations as well as include additional clauses like non-compete and non-solicitation clauses. 

CEO Law is a technology-enabled law firm that is challenging traditional law’s status quo. As part of our document generation solution, you can create customized legal documents (including a shareholder agreement) for a fraction of the price that it would typically cost a lawyer to draft them. A list of available documents can be found here. 

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