A Shareholder Agreement is a written understanding between or among the shareholders of a company. It may also be called a Stockholders’ Agreement. They are more prevalent among small, closely held companies. Their purpose is to supplement the primary governing documents-the articles of incorporation and other constitutional documents-of the company, to allow the shareholders to elaborate on the running of the company. The constitutional documents remain controlling, however, especially against outside parties.
Average Shareholder Agreements may be full of a number of important provisions, which may or may not be of importance either to the directors or the shareholders.
For management, relevant clauses include rules or guidelines on:
- The transfer of shares;
- Rights of first refusal, either for the company or other shareholders;
- Share distribution;
- The composition, duties, and rights of the board of directors;
- Compensation for the board of directors; and
- Change of control scenarios, especially death and retirement.
For shareholders, the relevant provisions talk to:
- The duties and rights of the shareholders;
- Capital contributions;
- Classes of stock;
- Price of stock;
- Vesting dates;
- Dispute resolution mechanisms; and
- Voting.
The reasons for the use of Shareholder Agreements include:
- Privacy - constitutional documents are open to the public; shareholder agreements may be kept private.
- Ease of use - shareholder agreements are easier to produce, implement, change, and terminate than are constitutional documents; and they may be less expensive, too.
- Adaptability - they can conform to whatever purpose the shareholders have in mind for them.
- Additional protection - for minority shareholders.
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