What is a shareholder agreement?
A Shareholders Agreement (SHA) is basically a contract between a shareholder and a company that sets out the rights and obligations of the shareholders with respect to the company.
If a person owns stock in a company, that person is also responsible and accountable to the company.
Shareholder agreements ensure that all owners of an organization contribute equally to the welfare of the organization and that the organization operates fairly.
This means that everything a shareholder is expected and obliged to do is spelled out in the contract. How is it different from the Articles of Incorporation created when the company was established?
First, the creation of an AoA is required by law but does not require shareholder consent.
Although not required by law, almost every company that does business with more than one person in the company has this legal document.
Second, shareholder agreements focus entirely on the rights, obligations, and protections of shareholders. Memorandums of Association cover other topics and subtopics related to company formation. Some terminology may be similar in the two documents, but the shareholder agreement explains all the parts that involve the owners of the company.
Benefits of shareholder agreements
A separate partnership agreement has several advantages. The main ones are listed below.
Protection of minority shareholders
Corporate shareholders can be divided into two large groups, majority and minority.
Simply put, the people who sit in the chair and run the company are the controlling shareholders. They own his 51% of the company and make all the important decisions. On the other hand, the purchase of shares in a company by the general public through a stock exchange is an example of a minority shareholder. You have no right to interfere in company decisions.
Because of this lack of authority, minority shareholders can be easily exploited by those in power.
Shareholder agreements protect and protect these minority shareholders, especially by clearly regulating their rights and obligations towards the company.
This agreement ensures that no decisions are taken by the Supervisory Board that harm or prejudice minority shareholders.
Provide clear guidelines
Imagine how a country without a constitution would work. It’s troublesome.
The same applies to company shareholder agreements. It sets out a set of rules and regulations that all shareholders must follow in order for the transaction to proceed peacefully.
Without these rules, everyone follows personal goals, not corporate goals. That’s never good for the company!
A shareholder agreement establishes certain policies and procedures related to the governance of the company.
This ensures a consistent, uninterrupted workflow for your organization.
Dispute Resolution
What happens in shareholder fallout? Or what if he/she commits fraud? There are many situations that can arise in company functions. The resolution of conflicts of interest will be referred to the shareholders’ agreement.
Minimize the potential for future conflicts by pre-assigning each situation and explaining the actions to be taken.
For example, if a conflict of interest arises between two directors, the shareholders’ agreement will determine how the matter is resolved.
Give Shareholders Certain Powers
A shareholder is defined as a part owner of a company.
Even if a person owns stock in your company, he or she owns part of the company and therefore deserves a certain level of authority.
In general, the company’s day-to-day operations are managed by the company’s directors.
With shareholder consent, some of these decisions are subject to shareholder vote, require shareholder approval, and provide greater power within the company.
This makes shareholders feel recognized and valued. This is a great way to maintain the long-term health of your business.
Now that we understand the importance of drafting a shareholder agreement, let’s take a look at the process.
Things You Must Include in your Shareholders’ Agreement
A shareholder agreement is indeed an important document of immeasurable value.
However, the design is very simple. Ultimately, this is your business, and you can add terms that you deem meaningful for the future.
It’s a blank slate that you can customize with your company’s welfare in mind.
First, here are some things that can be included in a shareholder agreement:
Definition and Interpretation
This section provides definitions of certain terms used in the rest of the document.
Bring clarity to both the company and shareholders when reading the document.
Some words or abbreviations may be brand specific and should be included in this section to avoid confusion.
Capital Structure
This section defines the company’s capital structure in terms of its authorized share capital.
Share capital is the amount a company receives from its shareholders in exchange for shares. It is essential to determine the capital structure so that the breakdown of ratios is understandable to all involved.
This section also specifies future funding methods.
Therefore, if the company were to experience financial difficulties, this part of the contract would set out the procedure for issuing additional shares.
Restrictions On Sale and Transfer of Shares
This is an important section from a shareholder perspective.
Establish mutually agreed rules and procedures to ensure that shares are not sold or transferred against the will of shareholders, especially minority shareholders.
Company management
Corporations typically have thousands of shareholders who own a small percentage of all shares. Therefore, we cannot consider everyone’s opinion on company decisions.
This section designates the management team, including the company’s board of directors.
This section should also include board composition, qualifications, voting procedures, board action, resignation and removal procedures.
It is important to note that the presence of a board does not detract from the importance of shareholders in the decision-making process.
Therefore, this section should also include a quorum. H. Number of people required for a session to be considered valid.
Rights and Obligations of Shareholders
This is arguably the most important part of the agreement.
It stipulates the quorum for shareholder meetings, voting procedures, shareholder rights, and obligations to the company.
The rights that shareholders can exercise in the company include voting rights, the right to call shareholders’ meetings, the right to appoint directors, the right to view the company’s books, the right to take away, the right to take away. Away right, first veto, etc.
They are all mentioned in this section. It also provides certain special rights to protect minority shareholders.
Representations and Warranties
As mentioned earlier, a shareholder agreement is a blank slate and can be filled with any rules and regulations you want your company to adhere to.
However, it must be consistent with the legal system of the country, and no part of the agreement must contradict or disregard laws made by the government.
This section of the shareholder agreement ensures just that. that no part of the contract violates applicable law, that the parties to the contract have not taken legal action against it, and that the contract is entered into with the consent of all board members. says.
It’s like a disclaimer in a shareholder agreement.
Miscellaneous
Others omitted can be mentioned in other sections.
For example, procedures for terminating contracts, arbitration in the event of a dispute, applicable law determining the jurisdiction of the courts in such cases, and all other company-specific details.
All these sections are completed with commitments and signatures from all parties involved in the process. Drafting shareholder agreements requires a lot of brainstorming and teamwork when preparing future documents.