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.
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