Five Important Elements of a Shareholder’s Agreement

Five Important Elements of a Shareholder’s Agreement

Depending on the situation, and whether you are a majority shareholder or minority shareholder, a Shareholder Agreement (or a Member Control Agreement in the case of a limited liability company) can add value by bringing clarity and minimizing disputes.

Five ways a Shareholder Agreement can be a benefit:

1) Share Subscriptions

When a new investment is made in a company, the investor should have a shareholders’ agreement drawn up which will govern how the company is to be run at the time of subscription.

2) Sale of shares

What happens if a shareholder wants to sell his or her shares to a third party? What if they are forced to do so due to divorce? The sale or transfer of shares can be problematic, particularly if it results in unwanted shareholders. A shareholder agreement can address such issues via buy-sell provisions including additional procedures such as tag along, drag along, offer round, lock in or a combination of these.

3) Company operations

The agreement might also cover the operations of the company such as a right for a minority shareholder to appoint a director to the board of the company or to committees of the Board.

4) Vetoes

One of the most important sections of a shareholders’ agreement is a vetoes section which lists out a series of transactions which cannot be carried out without the consent of the protected minority shareholder.

5) 50/50 shareholders and deadlock

A critical part of any agreement will also deal with a situation where there are two shareholders with each having 50% and no agreement in relation to a substantive course of action.

These are only some of the issues that should be addressed in your agreement. Circumstances will vary from situation to situation. But trying to draft one yourself or copying a template that you might come across is not the smartest thing to do.

A poorly drafted shareholders’ agreement, or none at all, will cost you a lot more than the cost of having one drafted by your attorney.

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