What is a shareholders agreement

What is a Shareholder Agreement and Why Do I Need One?

Setting up a limited company with your near and dear ones seems easy as you think that nothing bad will happen in the future. As you believe that you have a strong relationship with your partner or relative and you don’t need any type of agreement such as a shareholders’ agreement. It might be fine. But what if something worst happens? You’d be suffering a lot of troubles afterward due to possible legal disputes. Therefore, it is advisable to do all legal documentation while starting out your company. This agreement safeguards your rights and keeps you protected for the future.

 

In this short blog, we’d quickly review what is shareholder agreement, what’s included in it? And why do you need one?

 

Let’s delve deep into it!

 

What is a Shareholder Agreement?

It is also known as a stockholders’ agreement. As the name suggests, it is an agreement between the companies’ shareholders that provides a systematic plan about the company’s operations. It also describes the role, responsibilities, and rights of companies’ shareholders.

This agreement:

 

  • Determines the right and responsibilities of shareholders
  • Controls the sale of shares
  • Provides a roadmap to the company
  • Protects minority shareholders and company
  • Provides the most important decisions for the company

 

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Why do I need it?

Shareholder agreement protects the right of minority shareholders (possessing less than 50% shares) and provides them the equal opportunity to contribute while taking the company’s decisions. As minority shareholders have less authority due to the small share they own. But this agreement ensures that all shareholders need to take important decisions and approve them together for the final change. Like altering or appointing new directors, taking loans, changing main trade, etc. If you’re a minority shareholder, you don’t need to worry about the issues arising from it.

Similarly, major shareholders also enjoy their rights and authority with this agreement. Issues of selling or transferring shares, sharing the company’s confidential information, deciding the shares’ prices, and other terms and conditions for the companies development are ascertained in this agreement. That’s how this agreement saves the overall operations of the company.

It helps to resolve disputes among shareholders by specifying procedures to resolve disputes.

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What to include in the Shareholder Agreement?

It varies depending on the number of shareholders and their shareholding. But the key points that should be included are:

  • Measurable guidelines on issuing shares and transferring shares. It should include how they can save their shares from the third party, ascertain the status of shares after the shareholder’s death and indicate the procedure to sell shares.
  • It should ascertain the rights of both minority and majority shareholders
  • Protection to minority shareholders having below 50% share
  • Guidelines for paying dividends
  • Operating the company including directors’ appointments, board meetings, business activities, capital, management information to shareholders, agreements with banks, and managing the company’s finances.
  • Dispute resolution and competition restrictions.

Quick Wrap Up:

A shareholders’ agreement may vary based on the company type, area, and business. It also overlaps with the article of association to some extent. You should know the article of association and shareholders’ agreement are quite similar to each other as both discuss the issues of company and shareholders. If you are looking for expert advice relating to this agreement, you are suggested to take legal advice.

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