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Shareholders Agreement

Updated on June 24, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Shareholders Agreement?

A shareholders agreement is a contract containing details about the type, nature, terms, and conditions of a business signed by a few or all shareholders of an organization. It also specifies the rights and obligations of each shareholder towards the company. The shareholders, however, can be either individual themselves or holding companies.

What is shareholders agreement

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A shareholders agreement is crucial for any business with more than one stakeholder. It safeguards the interests of the company and each of its shareholders by clearly stating how the former should work and specifying the relationship between them. The contract is also referred to as a stockholders agreement.

Key Takeaways

  • A shareholders agreement is a contract that provides information on the relationship shared between a company and its shareholders, along with the latter’s rights and obligations in the firm.
  • General and unanimous agreements are the two types of shareholders’ agreements.
  • The main contents of the agreement include sections related to the introduction of the parties, definition, business details, board of directors information, shareholders’ undertaking, restrictions, termination clauses, etc.
  • This agreement most often contains the first right to buy (also known as a right of pre-emption) for the current equity holders over the equity shares of those quitting the entity.

Shareholders Agreement Explained

A simple shareholders agreement is a corporate document defining the roles and responsibilities of each shareholder in an organization and specifying how the businesses should operate in sync with stockholders’ interests. By agreeing to the terms and clauses of this contract, shareholders are assured of being treated fairly and made part of the decision-making process in the organization.

The contract covers everything from shareholders’ undertakings to corporate distributions, shares valuation, and restrictions they must comply with. In addition, it protects the rights of both minority and majority shareholders. Having a hold on less number of shares, the minority shareholders do not get the right to participate in the company’s voting process. Signing a unanimous shareholders agreement, at least, helps such stockholders to have some influence in the firm.

Though the articles of association safeguard the rights of the minority shareholders, it is up to the majority stockholders if they let the former exercise their right over the organization. When the minority shareholders sign the contract, it refers to such loopholes in the corporate structure and allows them to be part of the company’s minor or major decision-making.

Sometimes, the minority shareholders are unwilling to cooperate with the majority stockholders. As a result, major significant decisions go on hold. This is where the stockholders’ agreement saves them. It protects the rights of the majority holders by introducing clauses that do not allow minority stockholders to do anything that is against the company’s wellbeing.

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Types

Let us find out in details the various types of the agreement that exists in companies. A shareholders agreement is found to have two forms – general and unanimous.

Shareholders Agreement types

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A general agreement is framed, considering the legal provisions by which the company should abide. It includes the corporate laws per which the companies and shareholders should operate. In short, it is a contract between two or more parties and is subject to the corporate laws governing organizations.

On the other hand, a unanimous shareholders agreement is framed, keeping each shareholder’s interests into account. Hence, every shareholder in the company must sign it. This contract also monitors and governs the acts of the board of directors. It is a document that transfers the directors’ powers to shareholders under common laws.

Format

Like any other document, a shareholders agreement template starts with a preamble that identifies the parties involved. Once the involved participants are introduced, the content of the agreement is segmented as per the following information:

Definitions

This section specifies the terms used in the contract along with the references and interpretations so that the clauses followed do not lead to confusion later and the parties read and understand the terms, conditions, and other details better.

Business Details

This segment of shareholders agreement template contains all information about the business. From the type, nature, and features to the purpose the company aspires to achieve, each and everything is mentioned in this section. In addition, it also states how businesses should operate and how shareholders would be responsible and accountable for it. Finally, the company-shareholders dealings and relationships are briefly mentioned in this section.

Board Details

The simple shareholders agreement, in this section, elaborates on the role of the board of directors. It also contains details about the board meetings and how the majority must approve the board’s decisions for the same to be active. The frequency of meetings and the directors’ appointment, replacement, and termination procedures are also specified in this segment.

Shareholders agreement format

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Shareholders’ Undertakings

This part of the document offers details regarding the buy-back options of the shares companies provide to stockholders if the latter gives up.  It might also mention an irrevocable undertaking of the shareholders to vote for the shareholder resolutions. This segment also assures the shareholders the right to say yes or no to future mergers and acquisitions (M&A).

Restrictions

As the name suggests, this contract portion notes the don’ts for the parties involved. In addition, it also contains limitations to the rights of the companies and shareholders. Thus, if the company or shareholders disobey the points specified in this section, it will violate the agreement.

Termination

This segment of the agreement will have the causes that might lead to the termination of the contract. It also specifies the violation and breach of terms and clauses of it. 

Confidentiality

Like every agreement, this part of the stockholders’ contract will make the parties involved keep the document’s terms, conditions, and clauses confidential. Once the agreement is active, the parties cannot share the contents with any third-party entity at any cost, except for rare situations mentioned within the contract.

Miscellaneous Provisions

Besides the details above, a shareholders agreement also mentions many other provisions. For example, the contract contains information on all aspects from funding and dividend policy applicable for the organizations, shareholders’ warranties, shares issued and transferred, and the company’s conduct to deadlock and default.

Example

Let us consider the following shareholders’ agreement example to check how such document begins with and also to understand the concept:

Shareholders Agreement example

Based on the requirements, the companies can frame the structure and put in the required information for shareholders to view their rights and obligations. For example, the portions that follow might look like this:

shareholders agreement template

Advantages And Disadvantages

Having a company shareholders agreement does resolve the disputes between companies and their shareholders. Still, there are a few cons that participants must be aware of before considering such contracts are flawless.

AdvantagesDisadvantages
Helps maintain privacyAmendment is difficult
Fair dealings helps in clarifying issues faster and in a more efficient way. It eliminates misunderstanding.Extreme protection for minority shareholders tends to be harmful to the company
Dividend policy is also mentioned so that it helps the management know the rules of the dividend paying policies in detail.The agreement offers limited flexibility.
It helps in protecting the interest of minority shareholders  
Different rights for different types of shareholders are detailed inn this document.  

Thus, these are some of the advantages and disadvantages of this document.

Shareholders Agreement Vs Articles Of Association

Both these above documents are very essential legal documents of a company. They are followed during the management process and in the day to day operations. However, there are some basic differences between them, as given below:

  • The company shareholders agreement is not a mandatory requirement but the latter is a mandatory legal requirement of any entity.
  • The former is legally binding for only the shareholders who have signed on the document but the latter is legally binding for all shareholders of the company.
  • The shareholders agreement is a flexible document that can be customized as per the requirements of the shareholders whereas the article has a standard format that is applicable for all companies
  • The former provides more details about the company since it can be tailored as per the company needs and can include many important information related to company operations and govenance, but since the latter is standard in nature it will only contain certain specific information only.
  • The former is not available to the public for inspection but the latter is available to the general public.

Thus, these documents are handy and have legal importance even though both are not compulsory to maintain. However, it is better if the entity holds both of them for better clarity in all matters.

Frequently Asked Questions (FAQs)

What is a shareholders agreement?

It is an agreement initiated between an entity’s members or equity holders. Accordingly, it has the power to monitor and regulate the relationship between these members or equity holders, the management scenario prevalent in the entity, and ownership of the equity shares.

Is a shareholders agreement legally binding?

Though there is no statutory act to govern the contract, it is completely framed based on the corporate laws and bylaws. It might not be legally binding, but it has a legal base.

Do you need a shareholders agreement to create a corporation?

No, a shareholders agreement is required once a corporation is created. This contract establishes clarity regarding the connection between the company or corporation and its shareholders, along with the latter’s role in the functioning of the former.

Recommended Articles

This article is a guide to what is a Shareholders Agreement. We explain its format along with example, differences with articles of association & types. We also discuss the advantages and disadvantages. You can learn more about accounting from the following articles –

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