A shareholder agreement, or a stakeholder agreement as some call it, is a form of arrangement among shareholders that breaks down the basis that a company's operations should follow. It also indicates the obligations and rights of stakeholders. A shareholders agreement also includes details regarding the company's management and the protection and privileges handed to shareholders.

A shareholders agreement aims towards guaranteeing the fair treatment of shareholders and protecting their rights. In most cases, it has sections dedicated to controlling the price of shares, especially when selling. It also allows the current stakeholders to decide on the foreign parties that can buy shares in the company and safeguards minority positions.

In a shareholders agreement, you will find a date indicating the number of shares issued, a capitalization table showing the different shareholders and how much they own, restrictions affecting the transfer of shares, and information about payments in case of a company sale.

Unlike company bylaws, shareholder agreements are optional. The document is mainly drafted by shareholders and contains the obligations and rights they have. Corporations mostly use it with a small number of active shareholders.

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Why do you need a shareholders agreement?

Coming up with a shareholder agreement is one of the things you can easily forget if you run a business. If you need to protect the value of your startup, you can get one here. It comes with different benefits, which can help prevent resentment between shareholders as the business continues to grow.

Below are some of the different advantages that come with having a shareholder agreement.

  • A shareholder agreement works together with your company's article of association. However, it offers more protection to shareholders, which they cannot access through the articles alone. The main reason for this is that many companies set up standard articles that do not have detailed protective provisions for the stakeholders or clearly outline their limits.
  • Usually, a company is subject to control in line with a comprehensive body of company law that controls how a company should be operated. However, a stakeholder agreement may contain an agreement between the stakeholders. Without it, the legal position may vary.
  • Unless stated otherwise in the shareholder agreement, the board of directors mainly determines the company's management. Some vital decisions, primarily affecting ownership, are made by the shareholders during general meetings or written resolutions. An agreement can help determine the basis for making important decisions, control the power of the directors, and protect the parties involved in the ownership against the acts of others when necessary.
  • Unlike articles of association which are public documents accessible from the Companies House, a shareholders agreement is private and confidential. It cannot be accessed by foreign parties such as business lenders and non-member employees.
  • Having a stakeholders' agreement is an affordable way to prevent business disputes between owners by clearly indicating how specific decisions are made and providing a framework for dispute resolution.

What does a shareholders' agreement include?

Any shareholders agreement includes different sections, but they may differ to some degree among other companies.

First, it offers a description of the parties. It should specify and identify the corporation as a single party with the shareholders making the other party. It also has recitals or "whereas" clauses which stand for something to take into account. For instance, it may indicate that the stakeholders wish to record their understanding.

Under the board of directors section, the agreement details how the directors of the company work. It states that the decisions made by the board should have the backing of a majority. It may also explain how to replace the directors. The company management and operation also fall under this category. It shows how board offices and directors are elected. The shareholders decide whether they need a two-thirds majority or a simple majority vote. They can vote on different aspects such as the declaration of a dividend, dissolving the company, filing for bankruptcy, or changing its business.

Another critical element included in a shareholders agreement affects actions involving shares. It explains the rights of the stakeholders to sell, transfer, or hold their shares as preferred. For instance, it can explain what happens to the shares of one party if they lose their life. It may also indicate what happens in the event of involuntary transfer of the shares of one party, for example, due to bankruptcy.

A shareholder agreement is a formal arrangement among the stakeholders of a company that outlines their rights and obligations. Every company needs one as it offers more protection to the shareholders and helps prevent disputes between them. It also regulates the decision-making process.

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