Why Your Business Needs a Shareholders Agreement

Shareholders, also known as stockholders, are the individuals who own shares of a corporation. A shareholders agreement is a crucial document that outlines the rights, duties, and obligations of both the company and its shareholders. While similar to a partnership agreement or an LLC operating agreement, a shareholders agreement specifically focuses on the voting and ownership of shares of stock.

Every corporation, regardless of size, needs a shareholders agreement. Even private corporations with a limited number of shareholders benefit from having this agreement in place. It helps control voting and ownership of the company, settle disputes, and outline procedures for accepting future capital contributions from new owners.

How Shareholders Agreements Work

Shareholders agreements are subject to state laws and federal regulations by the Securities and Exchange Commission (SEC) as shares are considered securities. These legally binding contracts should be drafted by an attorney to ensure compliance with state laws and enforceability in court. They are internal company documents that should be kept on file in the corporate office along with other records.

Key Sections of a Shareholders Agreement

Shareholders agreements typically include sections like:

Description of the Parties, specifying the corporation and shareholders involved

Recitals or “Whereas” Clauses to document mutual understanding

Board of Directors details on how the board functions and replaces directors

Company Management and Operation procedures for electing directors and handling shareholder voting

Actions Involving Shares covering shareholder rights to hold, sell, or transfer shares

Information and Meetings outlining reporting requirements and annual meeting details

Conflict of Interest addressing shareholders' interests in outside businesses

Effect of Noncompliance consequences for shareholders not following the agreement

Amendment and Termination processes for changing or ending the agreement

Governing Law statement on which state laws apply

Waiver of Jury Trial/Arbitration agreement to resolve disputes without a jury trial

New Parties allowing for transfers to other parties after acknowledging the terms

These sections ensure the shareholders agreement is comprehensive and clear, outlining responsibilities and procedures for all parties involved in the corporation. A qualified attorney can assist in creating a shareholders agreement tailored to your business needs.