The 3 most important reasons to implement shareholder agreements

What is a Shareholder Agreement?

In simple terms, a shareholder agreement is a contract entered into by the shareholders of a company that stipulates the rights and obligations of each shareholder towards the company. Shareholder agreements can address many different issues. However, there are three notable reasons companies with multiple shareholders must enter into shareholder agreements.

Shareholder Protection

Shareholder agreements can protect both majority and minority shareholders. Setting voting power and quorum thresholds, often at both board and shareholder meetings, and specifying that certain business decisions require the majority or unanimous approval of shareholders There is also The terms and mechanics of shareholder agreements may allow minority shareholders to join the controlling shareholder in certain share sale situations, but only if the controlling shareholder wishes to sell the shares it owns to other shareholders. may require all minority shareholders to sell their shares. third party.

Management of Share Transfer

Corporations and shareholders may want to control who they work with or do business with. Shareholder agreements provide shareholders with appropriate means to authorize or restrict who can transfer their shares. Restrictions may include requiring the unanimous approval of existing shareholders before a shareholder sells shares, or giving existing shareholders the first opportunity to purchase an existing shareholder’s shares . In addition, shareholders are sure to refer to the terms of the shareholder agreement to determine next steps in the event of unforeseen circumstances such as shareholder death, disability, divorce or bankruptcy. The shareholder agreement also sets out the processes and procedures to be followed to complete the transfer of shares, including the valuation of shares at the time of sale.

Dispute Resolution

Shareholder agreements are very useful in determining how to deal with shareholder disputes and deadlocks. Shareholder agreements may require resolution of deadlock situations through mediation, arbitration, or various other mechanisms. Without these dispute resolution provisions, serious disagreements between shareholders could lead to very costly and time-consuming legal proceedings and even the dissolution of the company.

In summary, companies with multiple shareholders are strongly encouraged to implement shareholder agreements. This is because it is a valuable tool that the company and its shareholders can rely on throughout the company’s lifespan, including corporate and personal circumstances. It changes as your business evolves and both expected and unexpected events occur. Without the security of a shareholder agreement, the company and its shareholders run the risk of not being able to effectively conduct company affairs, protect shareholders, and obtain the guidance they need to resolve disputes.

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