• October 2019
    M T W T F S S
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Shareholder Agreements Explained

A shareholder agreement formalizes the relationships, rights and responsibilities of shareholders in a company, as well as the value and ownership of these shares and protections given to each member.  Even if you have a great relationship with your partners and investors early on, a simple shareholder agreement can be vital in heading off disagreements and confusion as the company grows.


Shareholder Agreement Checklist

Though every shareholder agreement is unique to each company, these articles are usually included in the shareholder agreement:

  • Definition of Shareholders Rights –  This can include everything from electing leadership, access to preferred stock and general voting rights.
  • Specific protections and obligations for all parties For example, who is expected to contribute regularly to operations and decision making, and how do minority shareholders maintain influence?
  • Articles of Incorporation   The legal documents establishing the company
  • Company Bylaws Defining the company’s purpose and operational structure

When do you need a Shareholder Agreement?

When you are first starting your business, it may be hard to imagine anything going wrong. Perhaps it never well. However, it’s always best to prepare for the future by putting protections in place before an issue arises. Common reasons that company needs a shareholder agreement:

  • Helps to quickly and fairly resolve issues between shareholders
  • Allows shareholders to establish some regulation of management
  • Can outline restrictions if a shareholder chooses to leave the company
  • Offers protection for the majority and minority shareholders
  • Helps control the transfer of shares

A shareholder agreement simply allows business to operate more smoothly and avoid lengthy disputes later on. If you have an agreement in place prior to a problem, then you can rely on this contract to direct you toward a peaceful resolution.

What are Reserved Matters?

Reserved matters are key decisions that affect the direction of the company – e.g. capital expenditures, borrowing, even altering the existing business plan – that are decided as a group by the shareholders.  Defining not only what these areas are, but also who is allowed to vote and what level of majority – 51%? 75%? – is required to approve these decisions is critical to the management of a company. In short, reserved matters help a corporation find a balance between executive and collective decision making.

Avoid Shareholder Agreement Templates

As with most contracts, a shareholder agreement should be as unique as the company that it serves. Relying on shareholder agreements templates can hamstring this process which should include specific language and terms that are appropriate for your business. For this reason, you should seek legal help when drafting a shareholder agreement. The final version should include the insight of a skilled business attorney.

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