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Shareholder Agreement

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SHAREHOLDER AGREEMENT

THIS SHAREHOLDER AGREEMENT made this ________ day of ________________, ________,

BETWEEN:

_________________________ of _________________________
(the "Corporation")

OF THE FIRST PART

BACKGROUND:

  1. The Corporation is incorporated under the Virginia Share Corporation Act (the "Act").
  2. The Act permits the Shareholders to enter into a shareholder agreement in writing to restrict the powers of the directors of the Corporation to manage the business and affairs of the Corporation and to confer certain of the powers normally possessed by the directors of the Corporation on the Shareholders.
  3. The Shareholders have decided to enter into this agreement (the "Agreement") to govern their respective interests, obligations, liabilities, ownership and rights in the Corporation and to provide for the better government of the Corporation.
  4. All of the Shareholders have executed this Agreement.
  5. The Corporation has executed this Agreement for the purpose of acknowledging notice of this Agreement and, where permitted by law, for the purpose of agreeing to give effect to the terms of this Agreement.

IN CONSIDERATION OF the premises and mutual covenants and agreements in this Agreement, the sufficiency of which is hereby acknowledged, the parties agree as follows:

  1. Interpretation
  2. In this Agreement:
    1. "Articles" means the Corporation's Articles of Incorporation or Articles of Amalgamation, as the case may be;
    2. "Board" means the board of directors of the Corporation;
    3. "Business Day" means a day other than a Saturday or Sunday or statutory holiday;
    4. "By-laws" means the by-laws of the Corporation as of the date of this Agreement and as may be amended from time to time;
    5. "Fair Market Value" means the fair market value as determined by this Agreement;
    6. "Financial Statements" means the financial statements of the Corporation, prepared in accordance with generally accepted accounting principles;
    7. "Party" or "Parties" means all of the Shareholders and the Corporation;
    8. "Share" or "Shares" refers to one or more shares in the capital of the Corporation;
    9. "Shareholder" means any one of the Shareholders who is or later becomes a Shareholder in the Corporation;
    10. "Shareholders" mean any two or more of the Shareholders who are or later become Shareholders in the Corporation.
  3. Shareholder Agreement
  4. This Agreement restricts the Board's power to manage and supervise the Corporation to the extent necessary to effect the Shareholders' objectives as such objectives are set out in this Agreement and transfers such powers to the Shareholders. The Shareholders acknowledge that to the extent the Board's powers are restricted and transferred to the Shareholders, the obligations and liabilities of the Board, and the individual directors thereon, are also transferred to the Shareholders.
  5. By-laws and Articles
  6. The By-laws will be read as being subject to the provisions of this Agreement. The By-laws will not be amended or repealed except by written Agreement of all of the Shareholders.
  7. The Articles will be read as being subject to the provisions of this Agreement. The Articles will not be amended or repealed except by written Agreement of all of the Shareholders.
  8. Warranties
  9. The Corporation warrants that it has the necessary corporate power and authority to enter into this Agreement and to perform its obligations under this Agreement.
  10. Each Shareholder warrants that the Shareholder is not prevented by reason of law or any other contractual agreement from entering into this Agreement.
  11. Management of the Corporation
  12. The Board will consist of a number of directors equal to the number of Shareholders, and each Shareholder will be entitled to appoint one person to the Board and will have the sole right to remove and replace such appointee.
  13. Capital Requirements of the Corporation
  14. If all of the Shareholders determine by written resolution that the Corporation requires additional funds to meet the Corporation's obligations to its creditors or to achieve the purpose for which the Corporation was incorporated the Shareholders will provide the Corporation with an interest-free Shareholder loan (the "Loan") in an amount that is sufficient to enable the Corporation to meet such obligations or objectives, as the case may be. Each Shareholder will contribute to the Loan on a pro rata basis. The Shareholders may exempt any Shareholder from contributing to the Loan, but if less than all of the Shareholders contribute to the Loan, the Shareholders who contribute to the Loan will be entitled to interest at a reasonable commercial rate.
  15. Pre-Emptive Rights
  16. Subject to the limitations on pre-emptive rights in the Act, and subject to the Articles, any Shares issued by the Corporation will be offered and issued in accordance with the following provisions:
    1. The Shares will be offered first to the Shareholders of the class of Shares being issued (the "First Offer") on a pro rata basis.
    2. Any Shares remaining after the First Offer will be offered on an equal basis to the other Shareholders of that class (the "Second Offer") for not less than the subscription price specified in the First Offer and on terms not more favorable than those in the First Offer.
    3. Any Shares remaining after the Second Offer will be offered on an equal basis to all Shareholders in the Corporation (the "Third Offer") for not less than the subscription price specified in the Second Offer and on terms not more favorable than those in the First Offer.
    4. Any Shares remaining after the Third Offer may be offered to any person or persons (the "Final Offer") for not less than the subscription price specified in the Third Offer and on terms not more favorable than those in the First Offer.
  17. The First Offer, the Second Offer, the Third Offer and the Final Offer (collectively and individually the "Offer") will be in writing and will specify:
    1. the subscription price at which the Shares are offered;
    2. the date by which the Offer must be accepted, which will be not less than 10 Business Days from the date on which the Offer is made;
    3. the terms of the Offer; and
    4. the closing date for the transaction, which will be between 30 and 90 Business Days from the date on which the Offer is accepted.
  18. If the Offer is not accepted within the time period specified for accepting the Offer, the Offer will be deemed to be declined.
  19. Shares will not be issued unless:
    1. the subscriber is a party to this Agreement; or
    2. the subscriber agrees to be bound by and to become a party to this Agreement and gives a written and legally binding undertaking to be bound by and become a party to this Agreement.
  20. Restrictions on Transfer or other Disposal of Interest
  21. Shareholders will not and will not agree to directly or indirectly sell, assign, transfer, give, pledge, hypothecate or otherwise dispose of or in any other way encumber any Shares or any interest in any Shares and will not create any security interest in or grant any option with respect to any Shares or any interest in any Shares, except in accordance with the express provisions of this Agreement or except with the prior written approval of all of the Shareholders.
  22. Death or Incapacity of Shareholder
  23. If a Shareholder dies or becomes incapable (the "Incapacitated Shareholder") of performing duties that the Shareholder is required to perform as a director or officer or as otherwise imposed by this Agreement by reason of sickness, injury, mental or physical incapacity ("Incapacity") and it appears as though the Incapacitated Shareholder will not recover so as to be able to perform those duties within 90 days of the Incapacity, the other Shareholders will purchase all of the Incapacitated Shareholder's Shares at Fair Market Value as soon as practicable but not later than 6 months after the Incapacity. If there is more than one other Shareholder purchasing the Incapacitated Shareholder's Shares, each Shareholder will, subject to the prior written agreement of the other purchasing Shareholders, purchase an equal amount of the Incapacitated Shareholder's Shares. Each Shareholder may obtain insurance on the life of any other Shareholder in an amount not exceeding the estimated Fair Market Value of that Shareholder's Shares. The proceeds from any such life insurance will be used for the sole purpose of purchasing a deceased Shareholder's Shares.
  24. Dispute Resolution
  25. In the event a dispute arises between two or more Shareholders, the Shareholders will attempt to resolve the dispute through friendly consultation. If the dispute is not resolved within a reasonable period, then any or all outstanding issues may be submitted to mediation in accordance with any statutory rules of mediation. If mediation is not successful in resolving the entire dispute or is unavailable, any outstanding issues will be submitted to final and binding arbitration in accordance with the laws of the Commonwealth of Virginia. The arbitrator's award will be final, and judgment may be entered upon it by any court having jurisdiction within the Commonwealth of Virginia.
  26. The dispute resolution process may be commenced by any of the Shareholders by the delivery of written notice (the "Notice of Dispute") to all other Shareholders. The notice will specify the dispute to be arbitrated, the issues of fact and law to be determined and the proposed arbitrator.
  27. Any Shareholder may object to a proposed mediator and propose an alternate by delivering a written notice of objection to all other Shareholders within 15 Business Days of receiving the Notice of Dispute. All of the proposed mediators will jointly appoint a mediator. If the proposed mediators are unable to agree upon a mediator, any party to the dispute may apply to the Court for the appointment of a mediator.
  28. Any Shareholder may object to a proposed arbitrator and propose an alternate by delivering a written notice of objection to all other Shareholders within 15 Business Days of receiving the Notice of Dispute. All of the proposed arbitrators will jointly appoint an arbitrator. If the proposed arbitrators are unable to agree upon an arbitrator, any party to the dispute may apply to the Court for the appointment of an arbitrator.
  29. If no Shareholder objects by written notice to the proposed mediator or arbitrator within 15 Business Days of receiving the Notice of Dispute, the proposed mediator or arbitrator will be presumed acceptable.
  30. Every mediator and arbitrator, and all proposed mediators and arbitrators will be at arm's-length from every Party to this Agreement and will not have any interest in the dispute.
  31. The mediator or arbitrator will, subject to applicable legislation, determine the procedure for hearing the dispute but will give written reasons for material findings of fact and a written decision.
  32. The mediator or arbitrator will determine the liability among the parties to the dispute for the cost of the dispute resolution process and for the payment of the mediator or arbitrator.
  33. Shot Gun Provision
  34. If any of the Shareholders have a dispute (a "Material Dispute") regarding:
    1. the manner in which the affairs of the Corporation are to be conducted;
    2. the business in which the Corporation should engage; or
    3. any other matter where the disagreement is of such a nature that it is likely to prejudice the operations or profitability of the Corporation

    and if the Material Dispute cannot be resolved within a reasonable period or through the mediation and arbitration provisions included in this Agreement, then any Shareholder (the "Initiating Shareholder") may initiate a forced buy or sell agreement (the "Shot Gun Provision").

  35. If there are only two Shareholders to this Agreement at the time this Shot Gun Provision is utilized, the Initiating Shareholder will give a written offer (the "Shot Gun Offer") to the other Shareholder (the "Offeree") specifying the price per Share (the "Price") at which the Initiating Shareholder is willing to:
    1. sell all of the Shares owned by the Initiating Shareholder; or
    2. purchase all of the Shares owned by the Offeree.
  36. The Offeree will, within 15 Business Days of receiving the Shot Gun Offer, give notice to the Initiating Shareholder indicating that the Offeree has elected to either:
    1. purchase the Initiating Shareholder's Shares at the Price; or
    2. sell the Offeree's Shares at the Price.
  37. If the Offeree does not respond to the Shot Gun Offer before 5 p.m. on the 15th Business Day after the date on which the Shot Gun Offer was received, the Offeree will be deemed to have agreed to sell the Offeree's Shares to the Initiating Shareholder at the Price.
  38. If the Offeree elects to purchase the Initiating Shareholder's Shares, the Offeree will tender a certified check for the Price within 10 Business Days of notifying the Initiating Shareholder that the Offeree has elected to purchase the Initiating Shareholder's Shares, and the Initiating Shareholder will transfer or cause to be transferred to the Offeree all of the Initiating Shareholder's Shares on receipt of the Price.
  39. If the Offeree elects or is deemed to elect to sell the Offeree's Shares to the Initiating Shareholder, the Initiating Shareholder will tender a certified check for the Price within 10 Business Days of either the date on which the Initiating Shareholder receives notice that the Offeree has elected to sell the Offeree's Shares or the date on which the Offeree is deemed to have elected to sell the Offeree's Shares to the Initiating Shareholder, and the Offeree will transfer or cause to be transferred to the Initiating Shareholder all of the Offeree's Shares on receipt of the Price.
  40. Failure to make a payment required by this Shot Gun Provision or failure to transfer the Shares as required by this Shot Gun Provision will be deemed to be a breach of contract and the non-defaulting party will, in addition to any other remedies available by statute or at law or equity, be entitled to and may elect to, by written notice within 30 Business Days of the default, purchase the defaulting party's Shares at 75% of the Price.
  41. If there are more than two Shareholders to this Agreement, the Initiating Shareholder may make a Shot Gun Offer to one of the other Shareholders, and the procedure in this Shot Gun Provision will apply as if there were only two Shareholders. The Initiating Shareholder may also make a Shotgun Offer to the other Shareholders as a group, and the other Shareholders will either come to an agreement among themselves to buy the Initiating Shareholder's Shares or will, as a group, elect to sell all of their Shares to the Initiating Shareholder, and the procedure in this clause will apply.
  42. Right of First Refusal
  43. Shareholders are prohibited from selling, transferring or otherwise disposing of their Shares or any interest in their Shares unless:
    1. the Shares are first offered at not more than Fair Market Value to the Shareholders of the class of Shares being sold on a pro rata basis ("Offer One"); and
    2. the Shares remaining after Offer One are offered to all other Shareholders on an equal basis ("Offer Two") for not less than the price specified in Offer One and on terms not more favorable than those in Offer One.
  44. The Shares remaining after Offer Two may be offered to any person or entity (the "Third Party Offer") for a period of 180 days from the date on which Offer Two was made for not less than the price specified in Offer Two and on terms not more favorable than those in Offer One.
  45. Offer One, Offer Two and the Third Party Offer (collectively and individually the "Share Offer") will be in writing and will specify:
    1. the price at which the Shares are offered;
    2. the date by which time the Share Offer must be accepted, which will be not less than 10 Business Days from the date on which the Share Offer is made;
    3. the terms of the Share Offer; and
    4. the closing date for the sale of the Shares, which will be between 30 and 90 Business Days from the date on which the Share Offer is accepted.
  46. Any Share Offer not accepted within the time period specified for accepting the Share Offer will be deemed to be declined.
  47. Tag-Along Provisions
  48. If a transaction involving the sale of Shares to a person, firm, partnership, association, or other entity that was not previously a Shareholder of the Corporation (a "Third Party") will result in the Third Party acquiring 50% or more of the Shares in the Corporation, the selling Shareholder or Shareholders ("Selling Shareholder") will not be entitled to sell the Shares unless the Third Party offers the following options to each remaining Shareholder ("Remaining Shareholder"):
    1. The Third Party will offer to purchase any Remaining Shareholder's Shares. This offer will remain open for a period of 90 days from the date on which the Third Party first acquires Shares in the Corporation.
    2. If the Remaining Shareholder is selling Shares of the same class and series as the Shares purchased by the Third Party, the price will be the same.
    3. If the Remaining Shareholder is selling Shares of a class or series other than the Shares purchased by the Third Party, the price will be the Fair Market Value of the Shares. If the Fair Market Value of the Shares is unknown, the Third Party will bear the cost of determining the Fair Market Value of the Shares.
    4. The Third Party will purchase the Remaining Shareholder's Shares on terms that are substantially similar to and not less favorable to the Remaining Shareholder than those in the transaction between the Selling Shareholder and the Third Party.
  49. Valuation
  50. The Fair Market Value of the Shares will be set by the Shareholders on an annual basis and will be communicated by way of a Shareholders Resolution declaring that the Shareholders agree that the Fair Market Value of each Share of each class and series is a specified amount.
  51. At the date of this Agreement the Fair Market Value of the Shares is as follows:
    • ____________________
  52. If the Shareholders cannot agree on the Fair Market Value of the Shares or fail to set the Fair Market Value on an annual basis for whatever reason, the Fair Market Value will be determined as follows:
    1. The Shareholder or Shareholders desiring the valuation will give written notice to all other Shareholders that a valuation is required (the "Valuation Notice").
    2. The Valuation Notice will specify the reason for the valuation and will name three (3) firms or persons that specialize in and have substantial experience in business valuation that are at arm's-length from all Parties (the "Potential Valuators").
    3. The Shareholders receiving the Valuation Notice will select one of the Potential Valuator's to act as the valuator (the "Valuator").
    4. The Valuator will value the Shares in accordance with generally accepted accounting principles in the jurisdiction in which the Corporation is incorporated or continued.
    5. The Shareholders will share the cost of valuating the Shares, and each Shareholder will pay an equal amount of the cost of valuation.
  53. Dividends
  54. Subject to corporate law solvency requirements and to the extent permitted by law and after payment of any Shareholder loans and after establishing sufficient reserves for the normal operation of the Corporation's business activities and debt serving requirements, all of the Corporation's profits will be distributed by way of dividend. Dividends will be distributed annually.
  55. Conflict of Opportunities and Non-Competition
  56. Each Shareholder agrees that any business opportunity that comes to the attention of the Shareholder while the Shareholder is a Shareholder, director, officer or employee of the Corporation and that is similar to or that relates to the current or anticipated business opportunities of the Corporation or that arises out the Shareholder's connection with the Corporation, belongs to the Corporation.
  57. Each Shareholder agrees that while a Shareholder, director, officer or employee of the Corporation and for a period of 6 months after ceasing to be a Shareholder, director, officer or employee of the Corporation, the Shareholder will not, solely or jointly with others:
    1. undertake, plan, organize or be involved in any way with any business or any business activity that competes with the current or anticipated business of the Corporation in the geographic area in which the Corporation carries on its usual business; or
    2. divert or attempt to divert from the Corporation any business the Corporation enjoyed, solicited, or attempted to solicit from its customers, prior to the Shareholder ceasing to be a Shareholder.
  58. Each Shareholder agrees that for so long as the Shareholder is a Shareholder, director, officer or employee of the Corporation, the Shareholder will not engage or participate in any other business activities that conflict with the best interests of the Corporation.
  59. Non-Solicitation
  60. Each Shareholder agrees that while a Shareholder, director, officer or employee of the Corporation and for a period of 6 months after ceasing to be a Shareholder, director, officer or employee of the Corporation, the Shareholder will not in any way, directly or indirectly, induce any Shareholder, director, officer or employee of the Corporation to leave their position with the Corporation or to compete in any way with the Corporation and will not interfere with the Corporation's relationship with its other Shareholders, directors, officers or employees. Such enticement or interference would be harmful and damaging to the Shareholders and to the Corporation.
  61. Notice of this Agreement on Share Certificates
  62. Any and all share certificates issued by the Corporation will have subscribed on them the following notice, or a notice in substantially the following form:
    • The shares represented by this certificate are subject to the provisions of a shareholder agreement, made the ________ day of ________________, ________, which restricts the right to sell, transfer or encumber any shares in the Corporation, including the shares represented by this certificate. Notice of the said agreement is hereby given. A copy of the said agreement may be obtained by sending a written request to the Board of Directors for the Corporation.
  63. Effective Date and Term
  64. This Agreement will come into effect on the date of its execution.
  65. This Agreement will remain in effect until the earliest of:
    1. the date specified in a written agreement, signed by all of the Shareholders, terminating this Agreement; or
    2. the bankruptcy, winding-up or dissolution of the Corporation.
  66. Address for Notice
  67. Service of all notices under this Agreement will be sufficient if delivered personally or mailed certified, return receipt requested, postage prepaid, to the following addresses:
    • _________________________
      _________________________
  68. Any Shareholder may, on written notice to all other Shareholders and the Corporation, change the Shareholder's address for notice under this Agreement. If the Corporation's registered address changes, the Corporation may, on written notice to all Shareholders, change its address for notice under this Agreement.
  69. Severability
  70. If there is a conflict between any provision of this Agreement and the Act, the Act will prevail and this Agreement will be amended in order to comply with the Act. Further, any provisions required by the Act are incorporated into this Agreement.
  71. If there is a conflict between any provision of this Agreement and any form of Agreement prescribed by the Act, that prescribed form will prevail and such provisions of the Agreement will be amended or deleted as necessary in order to comply with that prescribed form. Further, any provisions that are required by that prescribed form are incorporated into this Agreement.
  72. In the event that any of the provisions of this Agreement are held to be invalid or unenforceable in whole or in part, those provisions to the extent enforceable and all other provisions shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included in this Agreement and the remaining provisions had been executed by the Parties subsequent to the expungement of the invalid provision.
  73. General Provisions
  74. This Agreement will not be amended or modified except by the written agreement of all the Shareholders. All Shareholders, without the consent of the Corporation, may modify, amend or rescind this Agreement.
  75. This Agreement constitutes the entire agreement between the Parties and supersedes any previous agreement or representation with respect to the matters set forth in this Agreement, and there are no conditions, warranties, representations, agreements, express or implied, relating to such matters.
  76. This Agreement will be construed in accordance with and governed by the laws of the Commonwealth of Virginia.
  77. Headings are inserted for the convenience of the Parties and for the purpose of interpreting this Agreement. Words in the singular mean and include the plural and vice versa. Words in the masculine mean and include the feminine and vice versa. Words in the neuter mean and include the masculine and feminine and vice versa.
  78. This Agreement will inure to the benefit of and be binding upon the respective heirs, executors, administrators, successors and assigns, as the case may be, of the Parties.
  79. This Agreement may be executed in counterparts. Facsimile signatures are binding and are considered to be original signatures.
  80. Time is of the essence in this Agreement.
  81. The Parties will do all acts and things and execute all documents that are reasonably necessary or advantageous to enforce this Agreement according to its tenor and intent and each Party will bear that Party's own expenses in connection with the same.
  82. All dollar amounts in this Agreement refer to US Dollars, and all payments required to be paid under this Agreement will be paid in US Dollars unless the Parties agree otherwise.
  83. No Party will be liable in damages or have the right to terminate this Agreement for any delay or default in performance if such delay or default is caused by conditions beyond that Party's control including, but not limited to acts of God or government restrictions, wars, insurrections, natural disasters, such as earthquakes, hurricanes or floods and/or any other cause beyond the reasonable control of the Party whose performance is affected.

IN WITNESS WHEREOF the Parties have executed this Agreement on this ________ day of ________________, ________.

     
   

_________________________ (Corporation)

     
   

Per:_________________________ (SEAL)

     

Last Updated February 28, 2024

Written by 

Reviewed by 


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Fact checked by 



What is a Shareholder Agreement?

A Shareholder Agreement, also called a stockholder agreement, is a legally binding contract between a corporation's shareholders that outlines their rights, responsibilities, and obligations. It also includes information about management and how the company should be operated.

The specific contents of an agreement vary depending on the corporation and its shareholders, but it typically addresses the following:

What is a shareholder?

A shareholder is a part owner of a company. An individual, company, or institution can be a shareholder. They become one by owning at least one share of stock in a company.

If the stock increases in value, the shareholder makes a profit on their investment into a company. However, if the company performs poorly and the stock’s value drops, the shareholder can potentially lose money.

A company's shareholders will usually create a Shareholder Agreement to establish the rules governing the shareholders' relationships with the company and one another.

Why should I create a Shareholder Agreement?

A Shareholder Agreement is valuable for shareholders because it addresses crucial issues that help keep the company running smoothly. If there are future disputes between the shareholders, they can refer to the agreement as a guide for resolving the problem.

It’s recommended that the shareholders create a Shareholder Agreement before business begins. Doing so helps ensure shareholders agree and understand their rights and obligations to the company.

What happens if there’s no Shareholder Agreement?

When a company doesn't have a Shareholder Agreement, it significantly increases the likelihood of conflict between the shareholders. This is because there aren't rules to guide their acts, determine how they'll make decisions as a group, or find resolutions to disputes.

This is especially the case with smaller companies where two shareholders each hold 50% of the shares. If they disagree on how to proceed, it can create a deadlock. 

Shareholder Agreements can also regulate the sale of shares, so they aren't sold to a third party before the current shareholders can buy them.

What are shareholder rights?

As part-owners of a company, shareholders have certain rights. These rights typically include the following:

  • Appointing or dismissing directors (through a shareholder vote)
  • Attending shareholder meetings
  • Making important decisions regarding the company
  • Receiving dividends
  • Receiving reports about the company
  • Reviewing company records
  • Selling or transferring shares

Shareholder rights also include how shares are treated when a shareholder wishes to exit the company. Some standard clauses that handle how shares are transferred under such circumstances include:

Right of first refusal clause

This clause comes into effect when a shareholder wishes to sell their shares. Right of first refusal means they must first offer to sell their shares to other shareholders at a fair value. If the shareholders can’t purchase them, the selling shareholder can offer them to a third party.

Shotgun clause

A shotgun exit provision, also called a buy-sell agreement, may be used in the event of a shareholder dispute. It specifies that one shareholder can offer to buy another shareholder's shares. The shareholder who was approached with the offer can then either agree to be bought out or buy out the first shareholder's shares at the offered price.

Tag-along clause

A tag-along clause typically applies to majority shareholders who intend to sell a significant portion of their shares. It can also apply to a proposed sale that will result in a third party becoming a majority shareholder. The clause protects minority shareholders because a buyer must purchase their shares at the same price as the shares owned by a majority shareholder (thus agreeing to buy all the shares).

What is a share valuation clause?

A share valuation clause establishes how shareholders determine the value of a company’s shares. Valuation occurs when shareholders want to sell or transfer their shares to another shareholder or after they pass away.

Without establishing a method for share valuation, companies may experience unnecessary uncertainty or disagreement regarding the value of shares.

Share valuation clauses are sometimes called stock valuation clauses.

What's the difference between a Partnership Agreement and a Shareholder Agreement?

Shareholder Agreements and Partnership Agreements are similar but used under different circumstances.

A Partnership Agreement is used between two or more partners in a for-profit business partnership, whereas shareholders in a corporation use a Shareholder Agreement.

Can a Shareholder Agreement override Articles of Incorporation?

No, a Shareholder Agreement does not override a company's Articles of Incorporation. However, the shareholders and directors can amend the Articles to align more accurately with the Shareholder Agreement.

How do I create a Shareholder Agreement?

You can easily create a Shareholder Agreement by completing LawDepot’s questionnaire. Using our template ensures you complete the following necessary steps.

Step 1: Provide details about the corporation

Start your Shareholder Agreement by providing the corporation’s name, address, and state in which it’s located.

Step 2: Include details about the shareholders

Your agreement needs to specify each shareholder's name, address, and whether they're an individual or a corporation.

Step 3: State if the Shareholder Agreement will include warranties

State whether the corporation will provide a list of its current shareholders. Doing so confirms for the shareholders how many shares have been issued and who owns those shares.

If the corporation provides a list of shareholders, specify whether each shareholder will warrant that they are the sole beneficial owner of their shares. When shareholders warrant that they're the beneficial owner of their shares, no other person is interested in them, nor are they held in trust for someone else.

Step 4: Provide details about share ownership

In your agreement, you must also state the class of shares (e.g., Class "A" Voting, Class "B" Non-Voting, etc.) each shareholder owns, as well as how many shares they own.

Step 5: Determine how the corporation’s directors will be appointed

Include how the corporation will appoint its directors. Typically, the shareholders will elect directors or have each shareholder appoint one director. 

However, there are many other ways to go about choosing directors. For example, the shareholders may decide that the corporation’s president will select them.

When selecting directors for a corporation, it's essential to have fair representation for both majority and minority shareholders.

It should also be noted that all directors must act in the corporation's best interest, no matter how they were elected.

Alternate directors

In case of a vacancy, you can also appoint alternate directors that will step in. If you wish to do this, include the names of each alternate director in your Shareholder Agreement. 

Step 6: Specify the corporation’s officers

A corporation's officers include the President, Vice-President, Treasurer, and Secretary.

Specifying the corporation's officers may prevent subsequent shareholders from firing your officers even if they acquire a majority share or control of the board of directors. This may provide a level of managerial consistency to the company.

However, for the same reason, specifying the officers may also prevent the company from attracting new investors who want to install their own management team to run the corporation.

Step 7: State which decisions are subject to shareholder approval

You can use your Shareholder Agreement to specify which decisions are subject to the shareholders' approval.

The directors will generally make most of the decisions affecting the company's management. However, selecting specific management issues that will be decided by shareholders in the Shareholder Agreement preserves the right of the shareholders to maintain control over issues vital to the corporation.

Some areas that shareholders may want to maintain decision-making control over include:

  • Business and finance (e.g., selecting a bank for the corporation)
  • Capital and assets (e.g., disposal of assets valued above a certain amount)
  • Shares and new share issues (e.g., issuing new shares for non-monetary consideration)

Step 8: Determine the duration of the Shareholder Agreement

Determine when the Shareholder Agreement will take effect and when it will end. The agreement can terminate when all shareholders agree to end it or on a specific date.

Having an end date ensures that the shareholders can cancel the agreement regardless of all the parties agreeing. This is a beneficial arrangement if a demanding shareholder refuses to terminate the agreement despite termination being in the corporation's best interest.

If you choose a specific end date, you can always renew the agreement before it expires. If your agreement doesn't have an end date, you'll typically need a Termination Agreement to cancel it formally.

Step 9: Outline what happens if the corporation needs additional funds

Use your Shareholder Agreement to outline what will happen if the corporation ever needs additional funds. Specify whether the shareholders will buy more shares or provide loans to the corporation.

Also, state who will determine that the corporation needs additional funds. For example, the decision can require the approval of a certain percentage of the shareholders or the board of directors.

Step 10: State whether existing shareholders will have preemptive rights

Preemptive rights give existing shareholders the right to buy any newly issued shares from the corporation before offering them to outside parties. This arrangement protects existing shareholders by allowing them to retain their company ownership percentage.

Some disadvantages of preemptive rights are that they may cause long delays in the sale of shares and that they may discourage sophisticated institutional investors from investing because the third-party investors may get a smaller proportionate share of the corporation than they might want if the preemptive rights are exercised.

Step 11: Specify whether shareholders are prohibited from selling shares

Specify in your agreement whether shareholders are prohibited from selling their shares. This includes the sale or transfer of any interest in the shares.

Step 12: Outline the valuation of shares

If you wish to include a valuation clause, use your agreement to outline who will set the value of the shares.

If you decide that the shareholders will set the value annually, you can also specify the current value of the shares in each class and what happens if the shareholders fail to set a value.

If the shareholders don't set a value, the corporation can pay a professional valuator to set the value of the shares. Having the shareholders place value on the shares may lead to a large over-or-under valuation. Either mistake can be detrimental to the company and all affected shareholders.

Step 13: Decide if the corporation will pay dividends

If the corporation will pay dividends, specify the following:

  • What percentage of profits will be paid as dividends
  • How often will dividends be distributed (e.g., annually, bi-annually, or quarterly)
  • Any additional provisions for dividend distribution

Step 14: Specify what happens if a shareholder dies or becomes incapacitated 

Your agreement should specify what happens to a shareholder’s stock in the corporation if they die or become incapacitated. For example, your Shareholder Agreement can give the other shareholders the option to purchase their shares, or it may force the remaining shareholders to purchase their shares.

Step 15: Include non-compete and non-solicitation clauses (if applicable)

Your Shareholder Agreement can include non-compete and non-solicitation clauses that last anywhere from six months to five years.

Non-compete clause

A non-compete clause prohibits shareholders from competing with the corporation while they’re owners in the corporation and for a specific period after they have left the corporation.

In a small corporation, customers deal closely with the shareholder. A non-compete clause prevents an influential shareholder or former shareholder from attracting customers away from the corporation.

A shareholder that leaves the corporation may also have confidential information that they can use to compete against the corporation.

Non-solicitation clause

A non-solicitation clause prevents shareholders or former shareholders from inducing other shareholders, directors, officers, or employees to leave the corporation or to compete against it.

This clause prevents an influential shareholder from stealing key employees.

Step 16: Determine how the shareholders will resolve disputes

Specify whether the shareholders will use any of the following to resolve disputes: 

Mediation is a process by which a mediator assists the conflicting parties in negotiating an agreement regarding the issue leading to conflict. Arbitration is when the conflicting parties present their conflict to a neutral third party who decides how to resolve the issue.

Shareholders should use a mediator or arbitrator when they are deadlocked over an issue. Mediation and arbitration are superior processes when a long-term relationship is involved, and the survival of the business relationship is desirable.

Step 17: Sign the agreement

Finalize your Shareholder Agreement by having all the shareholders sign the document. 

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