In the United States, a shareholders’ agreement is an arrangement between the shareholders of an existing company and describes how the rights and obligations are divided between them. This type of agreement is also called a stockholders’ agreement. This agreement includes information about the management of the company and the privileges and protections of the shareholders. When starting a business that involves more than one investor, an agreement is an essential foundation on which to build this corporation.
While the articles of incorporation establish the key players in the corporation, the shareholders’ agreement establishes the shareholders’ (co-owners) roles and responsibilities. Also, the agreement is different from the company bylaws. Bylaws are mandatory documents and they outline the structure and governance of the company. Shareholders’ agreements, however, are optional and they lay out the rights and obligations of the shareholders.
This type of agreement is useful in making sure that all the shareholders are being treated fairly and that their rights are protected. In addition, initial investors can decide whether they want the corporation to have a relatively small number of shareholders, or whether they want to offer shares to the public. In such scenario, this document is useful because it provides the process through which outside parties can acquire shares in the company and become future shareholders.
Even if the companies are built on trust, it is recommended to establish an agreement in order to lay out some ground rules. A well written agreement can act as a safeguard and give shareholders more protection when a problematic scenario arises among shareholders. Not only does an agreement protect the investment of each shareholder, but it also protects the business.
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In essence, the shareholders’ agreement is a business contract, and each of the owners must be identified
The agreement must also name any officers of the corporation and set out the management structure. This document has a direct impact on how decisions are made in the company. As stated, every shareholder must act in accordance to their role in the agreement. Of course, they can establish a board of directors and a management team.
This document usually establishes the voting rights of all the shareholders and the type of vote that is required to make a decision. Some of the decisions require a majority of shareholders, or 51%, and other decisions can require an unanimous vote. For instance, the shareholders’ agreement can be changed only when all the shareholders agree to the modification.
An agreement for shareholders is also useful when there is a need to make decisions in regard to purchasing property or paying back loans borrowed on behalf of the company. The agreement provides protection to each shareholder against decisions taken only by some of the most powerful shareholders. Thus, the clearer the agreement is, the easier it is to make fair decisions.
The shareholders’ agreement aims to protect the investment of the shareholders in the company and to establish a fair relationship between them
The agreement lays out the rights and obligations of the shareholders, regulates the sale of shares, describes the business activity and management of the company and protects the shareholders. The purpose of the shareholders’ agreement is to protect both minority and majority shareholders. For instance, shareholders that own less than 50% of the shares have less control over the company.
However, the minority shareholders can still have control over important issues such as the issuance of new shares, loans, and modification of the agreement (which often requires unanimity of votes) by using a well drafted one. Moreover, the agreement can also benefit the majority shareholders. For example, when majority shareholders want to sell their shares and the minority shareholders disagree, an agreement containing a “drag along” provision will enable the majority shareholders to sell their shares without consent from the minority shareholders.
Furthermore, the agreement should also include the financial responsibilities of the shareholders
Even though at the beginning all the shareholders might be contributing their fair share, this may not last for the whole commercial relation between the partners. Thus, it is important to determine the amount of money each shareholder must invest in the business, together with the level of commitment that is required from each shareholder. In addition, the agreement should also include the manner in which dividends are issued among the shareholders. Dividends can be paid quarterly, every six months, or once a year.
Lastly, the shareholders’ agreement also determines the consequences of a business termination. A successful agreement previews an exit strategy for each shareholder. When drafting a it, the partners should have in mind what is an agreement for shareholders and couple of key aspects to include. Shareholders should consider including clauses referring to the issuance of shares, transfers of shares, shareholders’ protection, dividend payments, and dispute resolution procedures.
The agreement can terminate when all shareholders agree, or on a specific termination date. However, the unanimous shareholder vote should only be used when there is a relatively small number of shareholders, the company is not seeking additional shareholders, and the existing shareholders have a good working relationship.
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