Shareholder Agreement

When a corporation has two or more shareholders there should be a document drawn to make a formal agreement between the corporation and the shareholder. A Shareholder Agreement is a document that involves multiple shareholders detailing specific outcomes and actions that will be taken in the event a shareholder voluntarily or involuntarily leaves the company, or when the company ceases to operate.
Due to the complexity and legality of this document, you may want to consult the services of an attorney when you draft one of your own. Creating this type of document may be on the costly side, but it’s not as costly as compared to going into a long litigation process in the event of an ugly break up with a shareholder.
Some of the considerations you may want to take into account when drafting your own agreement are your options when your company goes into expansion, or the steps to be taken in the event of a death among the shareholders, or when the company goes into bankruptcy.
Rights of the Minority
Among the biggest risks of small corporations with unequal ownership is that owners with minority interests will be shut out in the decision making process of the corporation. Creating a Shareholder Agreement protects the interest of shareholders with less than 50% risk on their investment. Certain clauses in various agreements address the rights of minority shareholders (such as salary and withdrawal).
Supermajority Vote or Unanimous Consent
In order for shareholders with minority interests to have a say in all major decisions in the corporation, you can require to have a unanimous consent or more than a simple majority vote (or supermajority vote) with regard to these matters. But also keep in mind that requiring a unanimous consent may enable a disgruntled shareholder to put a damper on the efforts of the majority. A classic example to this is when the majority decides to sell the company, but a shareholder with a 10% interest on the company disagrees with the decision. The shareholders must come to an agreement to balance out the rights of the majority and the minority. If a 10% shareholder would be the only one who doesn’t want to sell, then the other shareholders with give the minority shareholders the option to buy out the other 90%.
Devoting Best Efforts
One of the problems that corporations sometimes face is when shareholders no longer show interest and no longer contributes to the time that was originally expected of them. This may come about when a shareholder takes interest on a competing enterprise. To avoid disagreements, you may indicate in your agreement the amount of time each shareholder must devote each week during the operation of the company. You could come to a general agreement that each shareholder must give their best efforts for the company.
Right to serve as Director
Having the right to serve as Director is one of the most effective protection for each minority shareholder. This allows the minority shareholder to be informed of the activities of the corporation and to take part in the Director’s meetings without being elected. Although this right does not guarantee the shareholder to get control in any of the decisions made by the corporation.
In the event that some shareholders vote that they receive a higher salary than other shareholders, you could place in your agreement that such changes must be agreed upon by all shareholders or at least more than a simple majority.
Nominating Officers and Employees
A common agreement in most Shareholder Agreements is the provision as to what offices will be held by each shareholder. Changes to these must be agreed upon by unanimous consent or a supermajority vote. You must be prepared however to the possibility that someone may be unable or unwilling to perform their duties and responsibilities.
Compulsory Buyout
In cases of disputes between shareholders, a compulsory buyout may be the best way to end the dispute. You can make this an open-ended agreement wherein either party can buy out the other. This could also be specific, as to which shareholder’s share are subject for a buyout. A formula for determining the buyout price should also be indicated in the agreement to avoid further disputes.
Transfer of Shares
Shareholders have a limited ability to sell their shares when it comes to most small corporations. This is done so that corporations can be protected from security law violations, as well as being protected from people whom they don’t want to take in as their shareholders. This limited ability to sell shares is usually done in combination with a buyout plan.
Additional Shares
It is important that your Shareholder Agreement must have provisions to cover issuance of new shares or mergers with other corporations to maintain a balance of power among the shareholders. Placing a clause that provides a unanimous or majority consent for decisions concerning events like these, or placing a provision that allows the issuance of new shares on a pro-rated basis may solve some of these situations.
Endorsement for Transfer of Substantial Assets
Adding a clause to your agreement that disallows considerations for the transfer of substantial assets, other than cash, can be a means to protect your shareholder’s value. Placing an endorsement on the shares informing potential transferees about circumstances concerning shares that are subject to certain restrictions when they are transferred. It provides a warning to the transferee and improves the chances of the corporation in the event that a lawsuit may ensue due to a transfer not done in accordance with the provisions of the Shareholder Agreement.
Formalities Arbitration
To save your company from the cost and burden of lengthy and expensive court trials, it would be a good idea to place an arbitration clause in your Shareholder Agreement. Former judges or lawyers are usually the ones who become arbitrators, that would mediate legal disagreements and make decisions that would be similar to what you would get in a court trial, minus the delay and the extreme cost.
Most Shareholder Agreements contain a standardized legal language or what is called as “Boilerplate” language. This is used mainly for efficiency and structure of the language of legal documents. Examples of these are the terms “entire agreement” (meaning no verbal agreement was added to the entire agreement), “severability” (means that the entire agreement does not need to be thrown out in case an invalid clause was found within the agreement), and “choice of law” (refers to which state’s laws would be used to interpret the agreement)