Shareholders Agreement

What is the Shareholders Agreement?

A shareholders agreement is a type of an agreement that is initiated between the members or equity holders of an entity and it has the power to monitor and regulate the relationship between these members or equity holders, the management scenario prevalent in the entity, ownership of the equity shares, and it even safeguards the equity holders from any form of injustice or deception.

A shareholders agreement is also known as stockholders agreement and it is more or less an agreement between the equity holders of an organization. A stockholder’s agreement even describes how an organization needs to be operated along with outlining the rights and legal obligations of the equity holders. This agreement must not be confused with the company’s constitutional documents since both are completely different from one another.

Types of Shareholders Agreement

Following are the types of stockholders agreement:

1. A General Agreement: It is a commercial contract established between two or more parties and is subjected to abide by corporate laws.
2. A Unanimous Agreement: It is agreement among all shareholders of the corporation and it is complicated of all types of agreements that are usually present in corporate law.

Shareholders Agreement Template

The following is the example of the shareholder’s agreement template:

Now, Agreement Witnesses the party in the agreement agree to the following:

1. Definitions
2. Organization of Company
3. Non-competition and the trade secrets
4. Shareholders loan to a company
5. Distribution of the Income and Losses
6. Transfer of the shares
7. Miscellaneous Provisions

How does it Work?

A shareholders’ agreement works by outlining the appropriate pricing of equity shares during the time when they are put on sale. The agreement also enables the equity holders to make powerful and impactful decisions with respect to what type of stakeholders may end up becoming future equity holders.

Provisions of a Stockholders Agreement

• A stockholder’s agreement comprises various sections that require all the equity holders to vote in favor of or against specific important matters. These key matters are concerned with issues like the dividend policy followed by the entity, directors’ terms of employment, business activities of an entity, acquisitions and mergers the entity is involved in and borrowing or lending terms with respect to particular sums.
• 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 an equity holder quitting the entity. This signifies that the equity holders who are exiting from the entity must primarily offer their equity shares to the equity holders who are going to remain in the same.
• These agreements might even comprise a designated process for the purpose of resolving issues like availing the services of an arbitrator or a third-party and if these disputes don’t seem to settle then this agreement can also be infused with deadlock provisions. Such provisions are used to empower the parties to vote for the purpose of winding up the entity.

Advantages

A shareholder’s agreement has numerous advantages. In the absence of such agreement, the disputes taking place between the directors/equity holders can only be settled through the provisions reflected in the company’s articles of association.

• Privacy- Shareholders’ agreement enables the companies to maintain the utmost level of privacy with respect to its internal affairs and the relationship existing between its equity holders.
• Dividends Policy- It even dictates the dividends policy. It states how the equity holders are entitled to receive profits and to what percentage. Clarifying the terms of dividend policy in the stockholder’s agreement automatically eliminates the probabilities of disputes that could arise with the announcement and payment of dividends.
• Non-compete Clauses- It even states a non-compete clause that prohibits the equity holders of a particular company to form a similar type of company that can have a direct competition with the former.

Disadvantages

• Lower rate of Flexibility– Shareholders’ agreement can restrict the flexibility of the company which can ultimately hamper its operations.
• Extreme Protection offered to Minority Equity Holders– It offers a huge rate of protection to minority equity holders and this can serve as a huge threat to the majority equity holders.
• Difficulty in the Amendment of Shareholders’ Agreement– The shareholder’s agreement can sometimes act a little tricky and therefore, make amendments really difficult since it would require all the equity holders to agree. This could not be possible in most cases as it is extremely difficult to procure a hundred percent agreement from the shareholders.

Conclusion

The shareholder’s agreement can provide huge assistance in resolving all sorts of disputes irrespective of their level of criticality and complexity. The stockholder’s agreement reads out in detail that how disputes can be settled and resolved.

The stockholder’s agreement ensures that the equity holders are fairly treated and their rights are duly protected in the company. It even allows equity holders of the company to construct effective decisions with respect to which type of stakeholders are eligible to become potential equity holders. It even offers an adequate measure of protection to the minority positions from being misguided.

Recommended Articles

This has been a guide to what is shareholder’s agreement. Here we discuss the template of a shareholders agreement with its types, working, and provision. We also discuss the advantages and disadvantages. You can learn more about accounting from the following articles –

• Calculate Shareholder’s Equity
• What is Shareholders Equity Statement?
• Ordinary Shares Capital Definition
• Negative Shareholders Equity Examples