What Is a Shareholders’ Agreement? Everything to Know About

What Is a Shareholders' Agreement?

A shareholders’ agreement, sometimes known as a stockholders’ agreement, is a document that lays out how a corporation should be run and explains owners’ rights and responsibilities. The agreement also holds details on the company’s management, as well as shareholder entitlements and protection.

A Shareholders’ Agreement’s Basics

The purpose of the shareholders’ agreement is to guarantee that shareholders are regarded equally and that their rights are respected. Sections of the agreement detail how to price shares fairly and legally (particularly when sold). It also gives shareholders the ability to decide which outside parties may become prospective shareholders and protects minority positions.

A shareholders’ agreement typically contains the following information: a date; the number of shares issued; a capitalization table that lists shareholders and their percentage ownership; any restrictions on transferring shares; pre-emptive rights for current shareholders to purchase shares to maintain ownership percentages (for example, in the event of a new issue); and payment details in the event of a company sale.

Shareholder agreements are not the same as company bylaws. The legal backbone of a company’s activities is formed by its bylaws, which work in tandem with its articles of incorporation. On the other side, a shareholder agreement is elective. This document is frequently written by and for shareholders, and it outlines specific rights and responsibilities. When a company has a small number of active shareholders, it can be quite beneficial.

An agreement for a startup will typically comprise the following components, as with all shareholder agreements:

  • The parties are identified in the preamble (e.g. a company and its shareholders).
  • A schedule of recitals (rationale and goals for the agreement).
  • Details about the company’s optional versus forced share buyback program in the case that a shareholder sells their stock.
  • A right of first refusal clause explains how the corporation has the right to buy the securities of a selling shareholder before they sell to a third party.
  • Notation of a fair share price, which is either recalculated annually or determined using a formula.
  • An insurance policy’s possible description.

The Author

Oladotun Olayemi

Dotun is a financial enthusiast who specializes in first-in-class financial content, including crypto, blockchain, market, and business, to educate and inform readers.