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What should I look out for in a shareholder agreement?

18th June 2012
By Robert Mark in Legal
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This is indeed a very important question before getting into a shareholder agreement. These days, as the ownership of shares in a company became common, the need for a shareholder agreement has increased.

If you are a sole proprietor of a company you don’t need such agreement. However, as soon as there is more than one owner in a company, such agreement is essential. The spirit of the shareholder agreement depends upon what type of company is contemplated.

What is a shareholder agreement?

A shareholder's agreement is a contract between the shareholders of a company where they agree to one or more of the following:

• Deal with the sale of the stock of the corporation by a shareholder or the corporation.

• Arrange for the purchase of stock when one shareholder dies or becomes disabled.
• Who will be the directors or officers of the corporation?
• When the corporation will distribute dividends.
• Compensation for shareholder-employees.
• Issues relating to the management of the corporation, such as borrowing, budgets, office and facility location, business name, business type, etc.

Why bother?
The shareholders often find themselves in a dispute with one another over operations of business. To avoid such situations, the shareholder’s agreement provides a realistic way for shareholders to leave without harming the business or the shareholder’s investment.

Why prefer a shareholder agreement instead of company’s constitution?
• Shareholder agreement stops the operation of the constitution of the company.
• It does not disclose about the internal affairs of the company to the public.
• It does not need to be registered.
• It promotes the relationship among the shareholders.
• It provides the chance to the shareholder to settle mechanism for the running of the affairs of the company out of the constitution of the company.

What a shareholder agreement do?
One of the prime purposes of the shareholder agreement is to control and handle smoothly such disruptive or disputed matters among shareholders. The first thing, this agreement clears that it is not a company, but the shareholders who owned the company. So, when a company is created, its founding shareholders determine how a company will be owned and managed. This takes the form of a "shareholders agreement". As new shareholders enter the picture, for example angel investors, they will want to become part of the agreement and they will most likely add additional complexity.

The extract of shareholder agreement for shareholder:
Being a shareholder, you should lookout for these provisions in a shareholder agreement.

• Obligations of the company to the shareholders: what responsibilities company demand from the shareholders is the most sought after point for a shareholder. Although the management and directors are the soul of a company but you also have some obligations under a shareholder agreement. Various decisions in company needs unanimous assent of shareholders, alterations in company’s constitution and laws, alterations in shareholder’s rights, decision over major transactions and decisions involving remuneration and other benefits are obligatory of the company as well as for the shareholders too

• How I will maintain my rights, if I am not present at the shareholder’s meetings: the shareholder agreement allows you to post a representative in absence of yours or by a letter subject to providing proof of identity and of ownership of his/her shares either by registration of the shares or by filing an immobilization certificate for bearer shares at the location stated in the convocation five days before the date of the meeting. This 5 day period may be reduced by decision of the board of directors. You can also reserve your rights of meeting by appointing a proxy from you

Shareholder Agreement also provides a clear definition of controls and distribution of power among shareholders so that the majority cannot force or impose the decisions on the minority ones

• According to the agreement, a new or existing shareholder can transfer his shares at a legally established stock exchange in accordance with the Company Law and the articles of association of the company

• The agreement also provides a clear definition of the use of personal assets in the business. The safe sides and the hidden bombs all are mentioned in the shareholder agreement and directed by the mutual concerns and negotiations of the shareholders

A comprehensive shareholder template is all you need to record important affairs of your agreement; thus releasing you from all other documentation. Net lawman offers such comprehensive shareholder agreements that are applicable for almost all type of business and corporations and incorporated with company’s constitutions and laws. These documents cover all possible rights of shareholder both in small and big companies.

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