Overview of Shareholders' Agreement

Overview of Shareholders’ Agreements

What is this document?

A Shareholders’ Agreement (sometimes known as a Stockholders’ Agreement) governs the relationship between the corporation and its shareholders. The agreement can describe how the company is to be managed and the rights and obligations of the shareholders.

When would I use this document?

Although it is not legally required for a corporation to have a shareholders’ agreement, shareholders’ agreements are often created when shareholders wish to provide for governance rules that are different from the applicable corporations legislation. For example, shareholders may wish to provide for a specific voting requirements for certain types of decisions.

Who signs this document?

The agreement is signed by each of the shareholders and the corporation. An individual with authority to bind the corporation will sign on behalf of the corporation.

More details about this document

Shareholders’ Agreements can range in length depending on the complexity of the agreement. A detailed agreement can be dozens of pages in length.

There are two (2) basic types of Shareholders’ Agreements. The Unanimous Shareholders’ Agreement (USA) must be signed by all shareholders and can shift decision-making powers from the directors to the shareholders. The shareholders (rather than the directors) will be legally responsible for such decisions. A simple Shareholders’ Agreement (non-USA) is an agreement among the shareholders that does not shift management responsibilities to the shareholders. Shareholders’ Agreements can be company-sided or investor-sided.

A Shareholders’ Agreement is a method of managing risks and creating mechanisms to resolve problems between the shareholders and the corporation before they arise. This can assist in avoiding legal disputes, as the Shareholders’ Agreement can outline what restrictions exist on the transfer of shares, how voting and approval of decisions are done, what happens in the event of a deadlock, what happens after the death of a shareholder, what confidentiality restrictions apply to shareholders, etc.

A Shareholders’ Agreement can also outline how third parties may become future shareholders and can provide safeguards for minority shareholders.

One of the most important uses of a Shareholders’ Agreement for a closely held private corporation is to determine what will happen if one of the principals leaves the corporation.

What are the core elements of this document?

The core elements include: Directors, Identification of Shareholders, Valuation of Shares, Director Meetings, Shareholder Meetings, Dispute Resolution, Inactive Shareholders, Share Transfer Provisions, Management of the Corporation, Deed of Adherence, Representations and Warranties.

Some examples of additional clauses include Reporting Requirements, Remuneration of Directors, Anti-Dilution, Drag Along Right, Right of First Refusal, Non-Competition, Non-Solicitation and Confidentiality.

Related Documents:

Shareholders’ Resolutions - depending on the circumstances the shareholders may pass a (unanimous) resolution approving the shareholders’ agreement or an amendment to that agreement.

Directors’ Resolutions - since the corporation will be a party to the shareholders’ agreement the directors may pass a resolution adopting the agreement.

By-Laws - (also called bylaws) deal with matters such as meetings, voting, borrowing, officers, etc.

Minute Book - this is where the corporate records are kept. An up-to-date copy of the shareholders’ agreement should be kept in the minute book.

Buy Sell Agreement/Shotgun Agreement - an agreement that provides for the forced buyout of a shareholder once it is triggered. These terms could be included in a shareholders’ agreement or used separately.

Share Buyback Agreement - an agreement that allows the corporation to buy back shares in certain situations eg. death, incapacity, or termination of employment/consulting contract of a shareholder.

Written by Rajah. Rajah Lehal is Founder and CEO of Clausehound.com. Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.