What is Shareholders Agreement : A Complete Guide for Small Businesses

Before understanding what a shareholder's agreement is, we should understand what a shareholder is. A shareholder can be a person, company or organization that holds stocks in any given company. Sometimes they are called stockholders of any corporation that holds one or more shares of stock in the corporation. These shareholders receive declared dividends if the company is earning profits and performing well. They also have a right to vote in the company on certain matters and can also be elected on the board of directors.

What Should Be Included In A Shareholders Agreement?

What is the Shareholders Agreement?

A shareholders agreement is an agreement between the shareholders of the company with a purpose to protect the rights and interests of the shareholders in a company as well as creating a fair and trusted relationship between the shareholders and company. It is similar to a partnership agreement or LLC operating agreement. It also states the operation of the company along with relationships between the shareholders so that there are no confusions or conflicts regarding the rights and duties of the shareholders. It is beneficial to both minority and majority shareholders.

Why Does Our Small Business Need A Shareholder Agreement?

If you own any number of shares in a small or medium-sized business like import or export services, you will definitely need a shareholder agreement for your business. However, it does not matter if it is a small or large business, but if your corporation is private and operating with only a few shareholders, it is essential to maintain a shareholder agreement. More small private corporations use these agreements more than public companies.

Starting up a new business, or performing a restructure from an existing one as well as executing other business related tasks such as trade finance, business banking or offshore banking services, it is always an exciting task and you have to think a lot about the smooth and correct functioning of business especially if you are carrying out your business with someone else like your friends or family members. Though it is not legally bound to have this agreement, having a shareholders agreement is helpful in focusing the voting rights, duties & responsibilities as well as the relationship of the shareholders between the company.

The agreement will:

• Set the shareholder’s rights and obligations.
• Voting and ownership in the company
• Regulate their sales of shares in the company 
• Provide a method of settling disputes
• Protect minority shareholders and the company

These shareholders' agreements differ from company to company and are made according to the bylaws stating certain rights and obligations. It is very helpful when the company has a small number of active shareholders.

Recommended read: 15 Key Questions Venture Capitalists Will Ask Before Investing in Your Startup

What Should Be Included In A Shareholders Agreement?

Whether you are starting a new business or have a large group of people investing in your corporation, the strategies for developing a well-prepared shareholders agreement are the same. All you need to conduct several planning meetings with those investors and try to come up with the details to put in that agreement you all are agreed on. 

There are certain key elements that you should keep in your mind while creating the shareholder's agreement. Here we have listed out some of the main points you must need to consider. Let’s have a look:

1. Power of Shareholders - Generally the day-to-day operations of the business are handled by the board of directors but if at any point of time, the shareholders believe that some of the decisions should not be left upon the discretion of the directors rather than demand for shareholders approval, then this fact should be included in the agreement.
2. Voting Rights - The shareholder's agreement should also include the voting rights of the shareholders along with the type of vote that will have in order to make a decision. You should decide which decisions require the majority of the shareholding or require a higher percentage of a majority vote in order to make a decision.
3. Amendment and Termination - Apart from the above-mentioned point, you should also include the amendment and termination related rights and obligations of shareholders in the agreement. It includes the process of amending the shareholder's agreement as well as the events causing termination. You must also state that the shareholder's agreement might terminate by a written agreement or the dissolution of the company or a specific number of years.
4. Dividend Policy - One of the main things the shareholders are concerned about is how will they receive profits from the company they have invested in. Therefore, a shareholder's agreement should state how these shareholders will be paid for their share of the profit. This is even more important if they hold a variety of shares with different dividend rights.
5. Right to Appoint Directors - To protect the rights of all shareholders, the shareholder's agreement should state the fact that whether they have a right to appoint the directors to the board of your company or not to protect their interests.
6. Resolution of Disputes - A shareholding agreement must contain a method for resolving disputes such as whether it might be through referral to a third party expert or arbitrator or anything else if a dispute occurs. It must also provide that in case if the dispute is unresolved, the parties can agree to vote and wind up the company.
7. Protection of Minorities - You should also keep in mind that a shareholding agreement must also provide protection for minority shareholders by reserving their decisions such as the ability of the company to issue further shares so that they could get the consent of all the shareholders not just the majority.
8. Company Management and Operation - Your shareholder's agreement should also describe how the directors and board office will be elected in the company. It describes the actions of shareholders on voting, dividend, dissolves of the company, bankruptcy, and changing the business of the company. 

Wrapping Up

Now you know the importance of a shareholders agreement for small or big business as well as what should be included in them. There is no doubt that the shareholder agreement is an important and essential tool for a company to have. It is also important to keep in mind that the agreement should be reviewed periodically to check.