Read This Before You Sign or Draft a Shareholder’s Agreement

So you’re finally ready to sign your company’s very own Shareholder’s Agreement, but you think to yourself, was this properly drafted? Will this document cover important legal stuff? Did I miss to include something that might’ve been important?

Whether you’re using a prepared template or drafting it manually with professional help, it still pays to know what contents matter and if your SHA will completely cover all loose ends.

Every form of business that involves a special arrangement between two or more parties requires a unique document for proper regulations.

These written agreements determine how certain transactions should happen, who’s responsible for them, and in some cases, should be able to resolve disputes and disagreements when they surface.

This is the premise where Shareholder’s agreements are based on and here’s what it should typically cover:

  • Qualifications for being a shareholder,
  • Qualifications for serving on the board of directors,
  • Contingencies for when a shareholder becomes incapable or ineligible.
  • Will the corporation be required purchase shares of a shareholder that’s leaving;
  • The price of shares of stocks and how much will be paid for the acquisition of such shares.

With those mentioned, let’s dig into the sections that make a well drafted Shareholder’s agreement. Always remember, that as an “agreement” it should evoke voluntariness and consistency on all involved parties and should have acceptable terms and conditions. It should as well prohibit any purpose of circumventing and defrauding your members.

Preamble and annexes

This section identifies the parties involved in the agreement. Typically the shareholders and board members are the parties involved. It’s important to get this part correct to establish individual positioning and responsibility within the organization properly.

Recitals

This sets the goals and objectives by setting forth the reasons for agreeing and the goals to be accomplished by the agreement. Get this right, and you set good standards among your shareholders that would not only benefit their interests but the good of the company as well.

Optional vs. mandatory

These provisions are found all throughout the agreement, and it identifies what circumstances a “buy back” of shares is optional or required. Clauses that say “shall” means it’s mandatory, while those with “may” means it’s optional. Make sure that the conditions are written out with the purpose to benefit the group.

Right of first refusal

This section regulates the sale of stocks to an outside party by a departing shareholder. This states that if a shareholder wishes to sell his shares to an outside party, he must first inform and give the details of the sale to the corporation and the remaining shareholders.

This allows them a chance to match the offer of the outside party and purchase the shares. It also keeps a separating shareholder from selling his shares without the other shareholders’ knowledge or consent. This part is critical as it protects the interests of your corporation from outside influence so make sure it is present and written correctly on the SHA.

Pricing and funding

Determining a Fair Purchase Price: there are two ways to determine the price of stocks of shares: either you determine a dollar amount per share that all parties agree to which can be revised annually, or, everyone agrees to a formula that will be used to establish a fair price at the time of the triggering event. You may need an accountant’s help to develop a reasonable method.

Funds for buy out: One way to cover the purchasing of a departing shareholders stock is insurance, and unless the company has purchased one, then the default option is for the remaining shareholders to cover the loss out of pocket if there are no other funds allocated for this matter. Make sure to consult a knowledgeable insurance agent if you wish to go down this route as this assures the added security and protection your shareholders need.