What is the Shareholders Agreement?
A shareholders agreement is an agreement 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. 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 entirely different from one another.
Types of Shareholders Agreement
Following are the types of stockholders agreement:
- A General Agreement: It is a commercial contract established between two or more parties and is subjected to abide by corporate laws.
- 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:
THIS AGREEMENT, dated [Date of agreement] is entered into by the following persons comprising of all the current shareholders of [Name of the Corporation] incorporated in [Place where a company is incorporated] doing a business of [Business Activity] having a full address as [Full Address].
The company’s authorized capital consists of [Number of Shares] ordinary shares, of which the following shares are issued by the company as fully paid.
[1st Shareholder Name] – [Number of Shares]
[2nd Shareholder’s’s Name] – [Number of Shares]
[3rd Shareholder’s’s Name] – [Number of Shares]
Total number of ordinary sharesOrdinary SharesOrdinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working. Such shares carry voting rights and are shown under owner’s equity in the liability side of the balance sheet of the company. issued: [Number of total Shares]
Now, Agreement Witnesses the party in the agreement agree to the following:
- Organization of Company
- Non-competition and the trade secrets
- Shareholders loanShareholders LoanShareholder's Loan is a type of debt financing in which the company's shareholders provide the funding. This is a subordinate loan, which means that repayment occurs after all other liabilities have been paid off, and even the interest payment is generally deferred according to the terms of the loan indenture. to a company
- Distribution of the Income and Losses
- Transfer of the shares
- Miscellaneous Provisions
IN WITNESS WHEREOF parties have hereunto agree to the agreement and seals this on ___ day of the _________, year___.
In presence of the: ) ___________________ [Shareholder’s Name]
) ___________________ [Shareholder’s Name]
) ___________________ [Shareholder’s Name]
How does it Work?
A shareholders’ agreement works by outlining the appropriate pricing of equity shares when they are put on sale. The agreement also enables the equity holders to make powerful and impactful decisions concerning 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 essential matters. These crucial matters are concerned with issues like the dividend policyDividend PolicyDividend policy is the policy that the company adopts for paying out the dividends to the company's shareholders, which includes the percentage of the amount at which the dividend is to be paid out to the stockholders and how frequent the company pays the dividend amount. 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. It 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 to resolve issues like availing the services of an arbitrator or a third-party. If these disputes don’t seem to settle, then this agreement can also be infused with deadlock provisions. Such provisions empower the parties to vote to wind up the entity.
A shareholder’s agreement has numerous advantages. In the absence of such agreement, any dispute between the directors/equity holders settles through the provisions reflected in the company’s articles of associationArticles Of AssociationArticles of association is a legally binding document that states the corporate rules, regulations, and purpose. It serves as a user's guide for executing the organizational tasks, directors' appointment and recording the financial information..
- Privacy- Shareholders’ agreement enables the companies to maintain the utmost level of privacy concerning 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.
- 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 provides 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. Therefore, any amendment is really difficult since it would require all the equity holders to agree. It would not be possible in most cases as it is challenging to procure a hundred percent agreement from the shareholders.
The shareholder’s agreement can provide massive 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 to settle and resolve the conflicts.
The stockholder’s agreement ensures that the equity holders get fair treatment, 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 also offers an adequate measure of protection to the minority positions from being misguided.
This article 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 –