Stockholder's Agreement: Why Do I Need One?

Stockholder's Agreement: Why Do I Need One?

When setting up a company, it is easy to assume that nothing can go wrong in the future. Even with family or friends, things fall out, which is why it is important to arrange the relationship in a shareholder’s agreement. Also, you might think that you don’t need one, shareholder’s agreements form a ground for anyone going into business with others.

A shareholder’s agreement, also known as stockholder’s agreement, is a legal agreement outlining the relationship among all parties and shareholders of a company. It describes how a company should be operated and outlines the shareholders’ rights and obligations.

What is it?

Shareholder’s agreements are private arrangements executed between the shareholders in a company. It can be between all shareholders or a selection to help protect investment, creating a balance within the relationships of all those included and essentially determining the company’s running.

It regulates the relationship between shareholders in connection with the company’s business. The purpose of the agreement is to define the relationship between different shareholders, their share, the management of the business, the disposal the shareholders rights and obligations.

What should be included in the agreement?

Each shareholders agreement should be customized for each business. Like any type of agreements, a stockholder’s agreement will include key components.

Typically, and along with boiler plates clauses, this agreement should contain the following key provisions:

·??????Party shares, roles and board meetings

Most shareholders agreements will say how many shares each party owns and how much they’ve invested in the company. The agreement will typically outline who is to work in the company and on what terms, with all the shareholders usually entitled to be directors. It’s common for agreements also to outline the board’s composition, the number of directors, the position of each one, the voting mechanism of the board and how often a board should meet.

·??????Reserved matters

It’s a of matters that cannot be voted on and changed unless all the shareholders agree. For example, a board of directors could not progress with any item on the list of the reserved matters without shareholders’ approval. Another list can be present which is the list of matters reserved to the board only.

·??????Selling, transferring and purchasing shares

Restrictions and guidelines on shareholders selling, transferring and purchasing shares will usually be included in the agreement. Specific provisions on this will also be included. Such clauses are called “drag-along” and “tag-along clause”.

·??????Restrictive covenants

Restrictive covenants will often be added to the shareholders agreements so that anyone departing the business is restricted in setting up a competing business in a way that is necessary to ensure the current business is protected. If the leaving party was to take clients, suppliers and even other employees away from the business, then this could significantly damage the business, which is why these measures are usually included.

Why have a shareholder’s agreement?

-???????Protection of investment: shareholders agreements can be designed to contain articles and outline procedures that are in the business’ best interests and to protect the investment placed by the shareholders.

-???????Resolving disputes: typically, shareholders agreements will outline a procedure that the shareholders need to follow should disputes occur. This can save a great deal of time and frustration and potentially help lead to resolution between the shareholders.

-???????Confidentiality and rights to documents: not only can shareholders agreements address whether the company’s information is publicly available, but they can also highlight individual shareholders’ rights to certain business documentation. These can include accounts documents, minutes to meetings and various other documents.

-???????Minority and majority shareholder protection.

-???????Dividends distribution: when shareholders have different percentages of shares, it’s important to have a shareholder’s agreement to set out a varied dividends policy so different dividends can be payable to all shareholders at an agreed rate.

-???????Regulation of company management.

-???????Transfer of shares mechanism.

-???????Deed of adherence: a shareholder’s agreement can be amended, and deeds added, meaning a new agreement doesn’t need to be drawn up should a new shareholder join. A deed of adherence is added when a new shareholder joins a company, and there is already a shareholders agreement agreed. This saves a great deal of time and money for all parties involved, and means business can continue without interruption.

A well drafted and thorough shareholders agreement is important as it can be used by the shareholders as a form of protection to protect their interests and enforce their rights. The fact that the agreement is in writing means that parties cannot later vary the terms and conditions of such agreement unilaterally in an effort to escape their obligations. Reach out [email protected]?to consult our team of lawyers and help you draft your shareholders agreement and meet your legal needs.