What is a Shareholder’s Agreement?

A shareholder’s agreement is a contract between the company and its shareholders. It outlines the rights, obligations of the shareholders, and provisions related to the management and the authorities of the company. The purpose of the agreement is to protect the interests of the shareholders; especially minority shareholders i.e the ones holding less than 50% of shares in the company.  

The Basics of a Shareholders’ Agreement

The shareholders’ agreement is intended to ensure that shareholders are treated fairly and their rights are protected. The agreement includes sections outlining the fair and legitimate pricing of shares (particularly when sold). It also allows shareholders to make decisions about what outside parties may become future shareholders and provides safeguards for minority positions.

A shareholders’ agreement includes a date; often the number of shares issued; a capitalization table that outlines shareholders and their percentage ownership; any restrictions on transferring shares; pre-emptive rights for current shareholders to purchase shares to maintain ownership percentages (for example, in the event of a new issue); and details on payments in the event of a company sale.

Shareholder agreements differ from company bylaws. Bylaws work in conjunction with a company’s articles of incorporation to form the legal backbone of the business and govern its operations. A shareholder agreement, on the other hand, is optional. This document is often by and for shareholders, outlining certain rights and obligations. It can be most helpful when a corporation has a small number of active shareholders.