In order to govern the rights and obligations of shareholders, between themselves and with the business corporation, it is important to have them enter into a Shareholder Agreement. The Shareholder Agreement is a useful tool to avoid conflicts between the different shareholders.
A Shareholder Agreement should deal with one or several of the following issues:
- Establishing shareholding;
- Withdrawing a shareholder, whether by voluntary sale or in accordance with a shotgun or piggyback clause;
- Protecting minority shareholders;
- Governing the powers of directors;
A Shareholder Agreement for Controlling Interest in the Shares
It is important that shareholders set out pre-established rules to determine who can purchase shares in the company. With the free market principle in place, a shareholder may sell shares to the highest bidder. It is therefore a good idea to grant a right of first refusal to the remaining shareholders to give them a purchasing priority on the shares that another shareholder wishes to sell.
Withdrawing a Shareholder
One of the shareholders is incapable of working, deceased or has defrauded the company. It is a very good idea to establish the parameters of how the other shareholders or the company itself may redeem shares, with a penalty or other redemption provisions. The Shareholder Agreement therefore allows the shareholders to decide how the shares shall be redeemed even before a conflict arises.
Protecting Minority Shareholders
All shareholders are not necessarily created equal. They may not own the same number of shares or have the same decision-making power. It is therefore important that minority shareholders be granted rights and feel involved in the corporation. Once again, this is why a Shareholder Agreement is so important.
Governing the Powers of Directors
Can only be accomplished through a unanimous Shareholder Agreement, which shall not only be binding upon existing corporate shareholders but those to come as well. It may prove useful for certain shareholders, who are not members of the Board of Directors, to have a certain level of decision-making power over the corporation’s operations.
Drafting a Shareholder Agreement is quite complex. It is highly recommended that you seek out the expertise of a professional who can meet your needs and advise you on the most appropriate clauses to apply within your own corporation.