THE VALUE OF A SHAREHOLDERS AGREEMENT

A shareholders agreement is a legally binding foundational corporation contract between a company’s shareholders that outlines how the business operates and dictates the rights, protections, and obligations of the owners. A shareholders agreement is designed to:

• Safeguard investments
• Define ownership rights and management responsibilities
• Ensure fair treatment
• Outline the fair and legitimate pricing of shares and transfer restrictions
• Prevent future management disputes
• Establish decisions about what outside parties may become future shareholders
• Provide safeguards for minority positions
• Ensure clarification of what the parties originally intended

Unlike company bylaws — which work in conjunction with a company’s articles of incorporation to form the legal backbone of the business and govern its operations — shareholders agreements focus on active shareholder rights and obligations. They ensure fair treatment, safeguard minority positions, and provide clarity in transactions involving shares.

Included Provisions in Common Shareholders Agreements

• Share Valuation & Transfers: Creates rules for how shares are bought or sold, formulas for determining the value of shares, and the “Right of First Refusal” and pre-emption rights to maintain ownership of shares within control of the existing group. This is designed to prevent unwanted outside influence on company operations. Pre-emption rights give existing shareholders the first right to buy shares before they are offered to outsiders. Drag-along rights allow majority shareholders to force minority owners to join in the sale of the company to a third party. Tag-along rights protect minority shareholders by allowing them to join in on the sale of a majority stake, ensuring they get the same deal.
• Management & Voting: Details the appointment and removal of the board of directors with their powers and duties, voting majorities required for major corporate decisions, and specific veto powers granted to minority shareholders to prevent oppression. Establishing the management structure and decision-making processes enables business decisions to be made with appropriate authority and oversight, including specific decisions that require shareholder approval, such as mergers, acquisitions, or significant borrowing.
• Dispute Resolution: Designates jurisdiction laws and establishes clear procedures for resolving conflicts — usually mediation or arbitration — to resolve deadlocks or conflicts among shareholders without resorting to costly litigation.
• Exit and Amendment Clauses: Outlines exactly what happens if a shareholder dies, becomes disabled, goes bankrupt, or wishes to leave the company. Buy-sell agreements and valuation methods ensure a fair process for shareholders and continuity of the company. Clearly defining how the agreement can be amended should represent the consensus of the majority. A well-written termination clause outlines how the relationship between shareholders can be fairly concluded.
• Financing & Capital Contributions: Clarifies the rules for initial capital investments, including the amount and the type, whether cash or assets. Future funding obligations include methods for raising additional capital to ensure the company is adequately financed and that all shareholders understand their financial commitments.
• Dividend Policy: Balances the need for profit distribution with rules for reinvesting profits back into the business. This ensures that shareholders’ expectations for returns are aligned with the company’s growth objectives.
• Restrictive Covenants: Non-compete and confidentiality clauses protect sensitive company information by preventing shareholders from sharing sensitive information or starting a competing business. Specific safeguards clarify what actions are acceptable.

How We Can Help

Drafting well-written and effective shareholders agreements requires a comprehensive approach and is much less complicated if done at the time of incorporation. The business lawyers at Corporate Securities Legal LLP focus on the corporate structure best suited to their clients’ needs and all potential issues that can arise. This approach helps shareholders avoid uncertainty and establish a trusting relationship with current and future shareholders. Give them a call to arrange a consultation.