Shareholder Agreement Information
What is a Shareholder Agreement?
A Shareholder Agreement, also known as a Stockholder Agreement, is a contract between the shareholders of a corporation.
The contents in a Shareholder Agreement depends on the corporation and the shareholders, but it usually addresses:
- Shareholder rights and responsibilities.
- Share ownership and valuation.
- Management of finances, business, assets, capital, and shares.
- Rules for issuing new shares and restrictions on share transfers.
- Actions to take upon the death or incapacitation of a shareholder.
- Conflict of interest rules, such as a non-compete clause or non-solicitation clause.
- Dispute resolution methods.
Essentially, it establishes the rules that govern the shareholders' relationship to the corporation and to one another.
What is a Shareholder?
A shareholder owns portions of equity, known as shares, in a corporation. If the company performs well, the shareholder profits. If the company performs poorly, the shareholder can potentially lose money.
When should a Shareholder Agreement be created?
Even in corporations that have only a small number of shareholders, a Shareholder Agreement should be created. The contract should be active before the company begins business to ensure all of the shareholders are in agreement over its contents.
What is the difference between a Partnership Agreement and a Shareholder Agreement?
A Partnership Agreement is used between two or more partners in a for-profit business partnership, whereas a Shareholder Agreement is used by shareholders in a corporation.
Why should I create a Shareholder Agreement?
A Shareholder Agreement document addresses important issues, such as the transfer of shares and the rights of shareholders and officers, to keep the corporation running smoothly.
In summary, this internal document can protect shareholders by confirming that everyone is in agreement over the corporation's rules, and can also be used to refer to in the event of future disputes.
In the Shareholder Agreement, shareholders may agree to limit how shares are treated in the event that a shareholder wishes to exit the corporation.
Some common provisions that permit share transactions include:
Right of First Refusal: When a shareholder wishes to sell their shares and part from the corporation, they must first offer to sell their shares to other shareholders at a fair value. If the shareholders cannot purchase them, the selling shareholder can offer them to a third party.
Shotgun Provision: A shotgun exit provision, also called a buy-sell agreement, may be used because of a shareholder dispute, and it specifies that Shareholder 1 can offer to buy Shareholder 2's shares, whereby Shareholder 2 can either sell at the offered price, or turn around and buy Shareholder 1's shares at the same price.
Piggy Back Provision: Also referred to as a "tag along" or "co-sale" provision, a Piggy Back provision applies to majority shareholders who intend to sell a significant portion of their shares. It protects minority shareholders because the buyer must also purchase their shares at the same price as the majority shareholder, therefore agreeing to purchase all the shares.