Why Have a Shareholder Agreement?

Published: January 16, 2018 at 12:23 by Renate Harrison

Although though there is no legal requirement to have a shareholder agreement, every company with more than one shareholder should have one. Shareholder agreements ensure that the rights and obligations of the shareholders are properly thought through. The agreement works together with a company’s articles of incorporation, but will give shareholders greater protection than can be provided by the articles alone, since companies are often set up quickly and cheaply with only standard articles that will not include much detail regarding protective provisions for shareholders.

As opposed to articles of incorporation, the shareholders agreement can remain private and confidential and does not have to be open to view by others such as creditors or non-shareholder employees.

Drafting a shareholder agreement may not seem like a priority when starting a new business, but it is better to get the agreement in place at the outset, since as time passes circumstances change and it be difficult to come to an agreement with your partners.

Here are some advantages:

Generally, the running of the company is left to the board of directors. However, the shareholders may agree that there are certain important decisions that should not be left to the directors and should require shareholder approval, particularly if there are directors who are not shareholders. This can be detailed in the shareholder agreement.

A shareholder agreement can provide a mechanism which, when one shareholder wishes to sell his/her shares, gives the other shareholders or the company a “right of first refusal” to purchase those shares first. These provisions can be used to prevent outsiders from acquiring shares in the company.

Having a shareholder agreement is a cheap way to minimize any potential for business disputes between owners by making it clear how certain decisions are made and by providing a framework and procedures for dispute resolution.

Shareholder agreements may prevent situations where changes in one shareholder’s personal circumstances can have an effect on the company or other shareholders within the company, safeguarding each shareholder’s financial interest in the company, and the interests of the shareholders’ families in the event of the death or disability of a shareholder.

The list above is not comprehensive but shows how a shareholder agreement can document the rights and responsibilities of shareholders in order to prevent disputes that may cause harm to the business.