Components of a Shareholders Agreement

What makes a shareholders agreement complete?

As the name suggests, the shareholders agreement is an agreement that deals with the rights and obligations of the shareholders in a particular company. There are some obvious advantages of the shareholders agreement (flexibility, low administer costs, confidentiality, increased protection of the shareholders) and unfortunately, some disadvantages (problems with bankruptcy, monopolistic practices).

However, all shareholders agreements would normally contain the following things: ownership and voting rights section, control and management section, dispute resolution and other features. The ownership section states how shareholders can trade the shares and outlines any restrictions that they might have. For example, some shares are not allowed to sell for some period – that can be a week but it can be a year as well. Or you can sell them, but you pay a fine for that. Other shares explicitly require approval by the Board and just then can be sold. Remember that before going for a shareholders agreement it is essential to know how to establish successful business relationships. 

There are shares that can substitute for obligations or even for real estate assets. In general, most shares can be sold freely but companies design different kinds of shares to meet their needs. There are more than 500 different types of shares according to many sources and it will take a while to describe all of them. It is also mentioned in this chapter, how interest on shares is formed. Some shares also give the right to vote while others do not. Many people are also given the opportunity to change the type of their shares. It is also very important to describe the per-emption rights here. This is the exclusive right to buy newly issued shares before anyone else. It is normally granted to current shareholders and it is meant to keep the control of the company. Minority shareholders also get protection in this section.

The section about management and control can also contain various things. Some shareholders have the right to nominate people for election to the Board of directors. Others have the right to veto decisions that are crucial for the company (some might require majority-veto, while others might not. Some shares entitle their holders to receive information that otherwise would be confidential.

The section that describes how future disputes are described is also very important. It states under what conditions and by whom, eventual disputes are regulated. That saves the company a lot of money and a lot of trouble, so be absolutely sure to describe well this section.

Other things which are normally included are what the business would do; any other important rights and obligations, conditions under which the agreement can be changed, ethical or environmental issues, responsibilities of the shareholders and others.

In general, you could include parts that would make clearer for the shareholders what their rights and responsibilities are. It is more likely to attract shareholders when they understand what you do and why you do it. If they are better protected, this is also a huge benefit for them and they would invest more readily in your company. Together with the shareholders agreement, you will often need a partnership agreement, that`s why it is essential to know why such kind of agreements are so important.