What is a Shareholder’s Agreement?
A shareholder’s agreement, also known as stockholder’s agreement, is a supplemental document to the constitutional documents of the company that governs the relationship between the owners of the company.
Corporate relationships are usually governed by the constitutional documents of the company which are:
- Articles of incorporation – This is the primary document and generally regulates the activities of the company including its objectives and powers.
- By-Laws – This is the secondary document. It generally regulates the company’s internal affairs and management. This includes procedures for board meetings and dividend entitlement.
This is most especially true with regards to activities relating to outside parties.
So what is the purpose of a shareholder’s agreement?
There are a number of reasons why shareholders would wish to supplement the constitutional documents such as:
- For Privacy - Constitutional documents are made available for public inspection while shareholder’s agreements are generally private between the involved parties.
- Less expensive and easier to form - Shareholder’s agreements generally cheaper and less formal to form, administer, edit and terminate.
- Dispute resolution – The shareholders may also agree that arbitration would be the resolution process to solve disputes between shareholders.
- Flexibility – The company may go through regular changes and it would not be very practical to change or amend the constitutional documents every time there is a change.
- Protection for minority shareholders – Additional protection for minority shareholders may or may not be included in a shareholder’s agreement.
Because of its flexibility, no shareholder’s agreement is the same as the others. However, generally it will contain these basic matters:
- Regulating ownership and the voting rights of the shares of the company that includes, lock-down provisions, restrictions on share transfers, security interests grants over shares, rights of first refusal for any shares released by the company, tag-along and drag-along rights and provisions for protection of minority shareholders.
- Control and management that includes power to designate a person for election in the board of directors, imposing super-majority voting requirements for extremely important matters to the parties involved.
- Provisions for resolving any future disputes between the shareholders that includes deadlock provisions.
- The nature and amount of initial contributions.
- The nature of the business.
- How future contributions are to be made.
- The governing law that covers the shareholder’s agreement.
- Ethical and environmental practices.
- Designation of responsibilities and key roles.
Unlike formal constitutional documents, like articles of incorporation, the shareholder’s agreement is much easier to form and amend.
However, sometimes it is in conflict with the existing articles of incorporations and company by-laws.
In some cases it may also be used as evidence of a conspiracy or of monopolistic practices
To make sure that those does not happen, it is important to consult a corporate attorney in drafting a shareholder’s agreement so that you can ensure that no laws are being undermined in the process.
This Article is provided as a free informative service to Fakih Law’s clients and friends. The Article is for general information only and should not be used as a basis for specific action without obtaining further legal advice.
